Even with many FTSE 100 stocks reinstating their dividends, there are very few with a yield over 8%. Persimmon (LSE: PSN) is therefore just one of a very select few. But it’s not only the dividend that attracts me to the housebuilder. Indeed, the firm has managed to perform resiliently throughout the pandemic and is currently in an extremely strong financial position. So, what other factors are there to take into account?
At the start of July, Persimmon released a trading update for the first six months of 2021. I found this update very positive and it is one reason why I am tempted to buy the stock. One positive was the fact that revenues were £1.84bn, over 50% higher than the same period in 2020. Revenues were also 5% higher in comparison to the first six months of 2019, demonstrating that Persimmon is performing at pre-pandemic levels.
Within the trading update, it was also revealed that the company has £1.32bn of cash. This shows that liquidity is good, and that will help the company in the face of any further adversity. An undrawn £300m revolving credit facility also boosts liquidity, especially as it has been extended until 2026. Such an excellent financial position is one reason why the FTSE 100 stock is also able to pay a dividend that yields 8%.
What are the risks?
Although Persimmon’s performance has been strong recently, there may still be problems ahead. For example, the stamp duty tax holiday, which was introduced by the government last year, is starting to be phased out. By the start of October, rates are due to return to normal. This may have an adverse effect on demand and may strain Persimmon profits as a result.
The Help-To-Buy scheme is also scheduled to end in 2023. Clearly, for any housebuilder, this is not good news, and may lead to lower house prices. This uncertainty is one reason why some investors have taken profits in Persimmon recently, despite the firm’s positive trading update.
The possibility of profits being hit also increases the risk of a dividend cut. Currently, Persimmon uses the majority of its profits to pay the dividend, and therefore, any dip in profits will be particularly problematic. This happened last year, when the company only paid a dividend per share of 110p, instead of the usual 235p. For investors buying the stock due to its dividend, this is a risk that must be highlighted.
Should I buy this FTSE 100 stock?
Overall, I believe the positives far outweigh the negatives. As affirmed by the recent trading update, 2021 has been a good year so far for Persimmon. For me, this limits the risk of an imminent dividend cut and therefore, the 8% yield is extremely tempting. Persimmon shares also have a price-to-earnings ratio of around 15, far lower than a number of other FTSE 100 stocks. This shows the stock is not overpriced. And I think it has upside potential, especially after falling slightly recently. I am very tempted to add this housebuilder to my portfolio.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.