Persimmon yields 12.7%, but can you trust it to deliver?

With a dividend yield of 12.7%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate a company in distress. Rupert Hargreaves looks at the numbers to find out if it's sustainable.

Persimmon shares currently offer the second-highest yield in the FTSE 100. With a dividend yield of 12.7%, (according to Refinitiv analyst estimates) the homebulider looks highly attractive from an income perspective.  

However, a high dividend yield (especially one in the double-digits) can indicate a company in distress. It can be a sign that investors are avoiding the stock, pushing the value of the shares down and the yield up.  

So, is that the case with Persimmon? Can you trust the dividend – or is the market sending a warning signal?  

Property market fundamentals suggest Persimmon shares have strong foundations  

The first place I start when assessing a company’s dividend credentials is its underlying market. If the underlying market is creaking, it may only be a matter of time before this weakness spreads to the organisation.  

Persimmon is one of the largest homebuilders in the UK. Its average private selling price of £267,325 (20% below the UK average) puts it firmly in the affordable and first-time buyer bracket. This is important because these two markets have different fundamentals to the rest of the real estate market.  

The builder also claims that its properties are 30% more energy efficient than existing housing stock. With energy prices spiralling out of control, energy efficiency is likely to become a major selling point for houses in the near future.  

Still, there’s no getting away from the fact that the outlook for the housing market is becoming more uncertain overall. Interest rates are on the up, meaning buyers are facing higher mortgage costs (the pain is likely to be felt more by buyers on low-deposit mortgages, who are mainly first-time buyers).  

And the average first-time buyer deposit has jumped by more than 50% in a decade, from just under £22,000 to more than £45,000. So, even though there may be plenty of incentives on offer for first-time buyers to help them on the property ladder, there are still plenty of hurdles to overcome.  

But, while these buyers are facing higher costs, they’re nothing compared to the costs owners higher up the ladder are facing. Buyers looking to acquire a second property not only have to deal with higher interest rates, but they also have to take into account a 3% stamp duty surcharge on top.  

Indeed, a first-time buyer paying £270,000 for a property (around the average in Great Britain) won’t pay any stamp duty. Someone moving to a new home will pay £3,500 and buying an additional property will cost £11,600.  

Based on these factors, I think sales of new homes in England will remain robust going forward, and Persimmon’s latest trading update seems to confirm this trend.  

The company’s growth suggests cash returns will continue 

After the first six months of the year, Persimmon is now expecting to complete 14,500 to 15,000 homes in 2022. The average private sales rate is running slightly ahead of last year’s level and build rates overall are up 10% on pre-covid levels.  

These data points are all heading in the right direction and the company is also making good progress in dealing with inflationary cost pressures facing the building industry. To push down costs, Persimmon is expanding production at its own brick, tile and timber frame factories, which is also increasing the reliance of the firm’s supply chain.  

Combined with the tailwind of rising property prices, this vertical integration helped the group expand its gross margin from 30.9% to 31% in the first half.  

With buyer demand staying strong, (the firm is 90% forward sold for the year) management is working flat out to maintain this growth. Persimmon bought 8,829 new housing plots in the first half, replacing 130% of plots (newly built houses) sold.  

This brings me back to the dividend. So far this year the group has already paid out 235p per share, giving a historic dividend yield of 13%. As of yet, management has not issued any guidance for 2023, although Refinitiv analyst estimates suggest the business will distribute 242p a share next year. Based on that, the forward dividend yield on Persimmon shares stands at 13.4%  

With 90% of sales locked in for this year, nearly £800m of cash on the balance sheet and a land bank big enough to support new developments for the next five years (at current build rates) I’d peg the chances of the firm being able to meet this 2023 dividend target as quite high.

Recommended

The ten investment trusts with the highest dividend yields
Investment trusts

The ten investment trusts with the highest dividend yields

Investment trusts are one of the best ways to participate in the stockmarket, and the way they are structured means they can maintain their dividends …
18 Aug 2022
Here are the best savings accounts on the market now
Savings

Here are the best savings accounts on the market now

With inflation at more than 9%, your savings are not going to keep pace with the rising cost of living. But you can at least slow the rate at which yo…
18 Aug 2022
How to invest today? Look to the past, not the future
Investment strategy

How to invest today? Look to the past, not the future

The past few years have seen so many changes to our way of life that many people said we had entered a “new normal”. But as it turns out, the new norm…
18 Aug 2022
House prices are cooling as mortgage costs rise
Property

House prices are cooling as mortgage costs rise

UK house prices rose at 7.8% in the year to June – down from 12.8% in the year to May. Is this the start of a house-price crash?
18 Aug 2022

Most Popular

Investors should get ready for a political revolution
UK Economy

Investors should get ready for a political revolution

Liz Truss will beat Rishi Sunak, cut taxes, and then shake up the Bank of England, says Helen Thomas
15 Aug 2022
How to protect your wealth as inflation hits new record highs
Investment strategy

How to protect your wealth as inflation hits new record highs

UK inflation has hit a new record high of 10.1%. It's going to hurt, says Dominic Frisby. Here's how you can protect your wealth.
17 Aug 2022
Don’t listen to the doom-mongers – the future is bright
Economy

Don’t listen to the doom-mongers – the future is bright

With volatile markets, raging inflation and industrial unrest, it may feel like things are bad and likely to get worse. But the end of the world is no…
15 Aug 2022