Are Persimmon shares a buy just for the 8% yield?

Models of houses on top of pound coins

FTSE 100 housebuilder Persimmon (LSE: PSN) offers a well-covered dividend yield of more than 8%. But Persimmon’s share price has only risen by 3% over the last year, lagging behind the 18% gain delivered by the FTSE 100 over the same period.

In my view, the obvious explanation for this is that the market is expecting a housing slowdown. However, Persimmon says that its forward sales are ahead of the same point in 2019. This makes the 8% yield look pretty safe to me — so should I be buying?

Back to normal

Persimmon boss Dean Finch says that the average weekly sales rate from open sites this year has been 20% ahead of the same period in 2019.

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

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

Building has returned to normal and so has Persimmon’s dividend. This year’s payout of 235p per share is equal to the payout planned for 2019. As I write, Persimmon’s share price is 2,850p. That gives the stock an 8.3% dividend yield.

What could go wrong?

Persimmon is making enough profit and generating the cash it needs to pay this dividend. Based on the housebuilder’s current performance, the outlook for the next 6-12 months looks pretty safe to me. So why aren’t more people buying the stock, pushing up its price?

I think there are probably two reasons. One is that housing is political in the UK, and the government has just changed the rules. The Help to Buy scheme has now been restricted to first-time buyers and is gradually being phased out. This may start to make it harder for companies like Persimmon to sell larger, higher-priced homes.

The second reason is that housing is also highly cyclical. We’ve seen a 10-year bull market in property since 2011. Not even the pandemic stopped house prices rising. When will the market turn? I think we must be closer to the end than the beginning.

Persimmon share price: why I’ve bought the stock

I am worried about the risk of a housing market slump. But the reality is that demand for new property still seems very strong. Mortgage rates are at record lows, so it’s never been cheaper to borrow money for a new home.

My feeling is that the housing market isn’t likely to crash unless we see another recession or a rise in interest rates. Both of these are likely at some point, but again, there’s no sign of this yet.

Right now, Persimmon looks decent value to me. The company has net cash of almost £1bn, a strong order book and very healthy 27% profit margins. Until market conditions change, I think the 8% dividend yield looks safe. I’m happy to sit back and collect the cash, and may buy more shares after today’s results.

The post Are Persimmon shares a buy just for the 8% yield? appeared first on The Motley Fool UK.

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Roland Head owns shares of Persimmon. 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.

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