I think the headline says it all. As part of the FTSE 100, the stock is among the biggest around. And it has a huge dividend yield of almost 8%, which is exceptional even after many FTSE 100 companies have reinstated their dividends.
The stock in question is the home builder Persimmon (LSE: PSN), which is down 5% today. A big decrease like this in less than a day is alarming, but I think it is also an opportunity for me to buy. Here is why.
Why is the Persimmon share price falling?
In early June, the FTSE 100 stock touched one-year highs. It brought the Persimmon share price within touching distance of the all-time highs it saw before the pandemic, in early 2020. I cannot fault investors for being tempted to convert some of their notional gains to actual ones at that point.
This is especially true because the future of property markets just entered an uncertain stage. Last year, the housing market got a huge boost from the stamp duty waiver. A fantastic housing market boom ensued in an otherwise languishing economy. And property companies, as well as their stocks, found themselves on a rising curve.
But this party is starting to wind down. The stamp duty waiver is in the process of being withdrawn from this month onwards. The duty was waived for values of up to ￡500,000 earlier, but is now waived for values up to ￡250,000.
Much value in this FTSE 100 stock
So, a tempered outlook on the stock is understandable. At the same time, I think there is still a whole lot of value to it. And here I am not even talking about the high dividend yield.
Consider this. The Persimmon price-to-earnings (P/E) ratio is at around 15 times. This is not terribly expensive. And its performance is strong. In its latest trading update, released earlier today, the company reported growth in revenues in the first half of the year, compared to the same time both last year and in 2019. It expects growth in the second half of the year as well.
My overall assessment
Of course we cannot ignore that real estate is a cyclical business. This means that there will always be highs and lows in it. So when I buy the stock, it is with two objectives in mind. One, the immediate high dividend income I will earn. And two, the long-term growth possible in its share price. Over the last 10 years, for instance, the share price has increased by almost 500%.
In the short term, I think it is possible that the Persimmon share price can drop more. To that, my answer will be to buy more. This way, I get to buy quality stock relatively cheap. Moreover, with each successive purchase, my average price for this stock declines. And the potential for gains over time is even higher.
