Business & Investment

Does Persimmon share a buy just for an 8% yield?

FTSE 100 House builder Persimmon (LSE: PSN) It provides a well-covered dividend yield of over 8%. However, Persimmon’s share price has risen only 3% compared to last year, lagging behind the 18% rise brought about by the FTSE 100 over the same period.

In my view, the clear explanation for this is that the market expects a slowdown in housing. However, according to Persimmon, futures sales in 2019 are above the same point. This makes the 8% yield look pretty safe to me. So do I need to buy it?

Return to normal

Persimmon boss Dean Finch says that this year’s average weekly sales from open sites are 20% higher than they were in 2019.

Finch’s bullish outlook is supported by numbers. The company completed 7,406 new homes in the first half of this year, compared to 7,584 in the first half of 2019. Profit reflects this. Persimmon’s pre-tax profit in the first half of 2021 was £ 480m, just 5.5% below the first half of 2019.

Given the Covid-19 limits and the impact of rising raw material costs, that seems pretty solid to me. Cash performance is also good. The group held £ 1.3bn in cash at the end of June, up from £ 830m in June 2019 and June 2020.

The building has returned to normal, and the persimmon dividend has also returned to normal. This year’s payment of 235p per share is the same as the payment scheduled for 2019. As I write, Persimmon’s stock price is 2,850p.It gives the stock 8.3% Dividend yield..

What could go wrong?

The persimmons are profitable enough to generate the cash needed to pay this dividend. Based on the current performance of homebuilders, the outlook for the next 6-12 months looks pretty safe to me. So why don’t more people buy stocks and push prices up?

I think there are probably two reasons. First, housing is political in the UK and the government Changed the rules.. The Help to Buy scheme is currently limited to first-time buyers and is gradually being phased out. This may start making it difficult for companies like persimmons to sell larger, higher priced homes.

The second reason is that housing is also very cyclical. Since 2011, the bull market for real estate has been 10 years. Even a pandemic couldn’t stop the rise in house prices. When will the market change? I think we have to get closer to the end than the beginning.

Persimmon Stock: Why I bought the stock

I am worried about the risk of a downturn in the housing market. However, in reality, the demand for new properties still seems to be very strong. Mortgage rates are record low, so borrowing money for a new home is cheaper than ever.

I feel that the housing market is unlikely to collapse unless there is another recession or rising interest rates. Both of these can occur at some point, but again, there are no signs of that yet.

For now, persimmons look decent value to me. The company’s net cash is around £ 1 billion, orders are strong and the profit margin of 27% is very healthy. Until the market changes, I think the 8% dividend yield is safe. I’m happy to be able to sit and collect cash, and may buy more stock after today’s results.

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Roland head I own a stock of persimmon. The Motley Fool UK does not have a position in any of the listed shares. The views expressed about the companies in this article are those of the author and may differ from the official recommendations made by subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, by exploring different insights, Better investors than us.

Does Persimmon share a buy just for an 8% yield? Does Persimmon share a buy just for an 8% yield?

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