Interactive Investor

Dividend star Persimmon remains a firm favourite

18th August 2021 08:18

Richard Hunter from interactive investor

This housebuilder has seen its shares drift lower this summer, so why do stock market analysts still love them?

Persimmon (LSE:PSN) continues to build on its strengths, with a healthy order book, robust balance sheet and careful management of the factors within its control all underpinning progress.

As trailed at its trading statement in July, for the most part the business has improved in the first half of 2020 from the levels it was experiencing pre-pandemic, and is strongly ahead of the comparative period last year.

As against 2020, home completions have risen 51% in the six months to 30 June, group revenues 55% and pre-tax profit 64%. At the same time, there has been an increase of nearly 4% in new housing operating margins, while the cash position stands at a comfortable £1.3 billion, versus a previous £800 million. The return on capital metric has also reached 37.9%, contributing to an average of 36.5% over the last three years.

The group has also taken the opportunity to address some of the issues it had been facing pre-pandemic, most notably in terms of build quality and customer satisfaction, both of which have shown significant progress.

At the same time the outlook is rosy, with forward sales 9% ahead of the 2019 figure, if a little shy of last year’s number given the unusual trading environment. The cumulative private sales rate is also now over 20% higher than the one seen two years ago.

There are some red flags, however, which have taken some of the shine from the recent share price performance and which Persimmon is seeking to manage where it is possible to do so. For example, the current cost inflation rate of building is running between 4.5% and 5%, propelled by labour shortages and blockages in the supply chain in terms of raw materials. This has been mitigated by the previously prudent move to introduce in-house supplies, meaning that the ability to source bricks, timber frames and tiles increases.

More broadly, the results run to the end of June, so do not encompass any effect which the end of the stamp duty holiday may have had. At the same time, the imminent removal of the government’s furlough scheme could put pressure on both unemployment levels and consumer confidence, neither of which would be positive for the housing sector generally. That being said, the overall environment remains supportive, with good mortgage availability, historically low interest rates and an ongoing shortage of housing in the UK generally.

In all, Persimmon remains the preferred play in the sector. Careful management of the business has ensured that progress is possible, at the appropriate time and when circumstances have allowed. The ongoing investment in land is also positive for future prospects and in the meantime the dividend yield of 8.2% is noticeably punchy in the current environment as well as being representative of management confidence.

The shares may have slipped recently, but remain ahead over the last year by 10%, as compared to a gain of 18% for the wider FTSE100, and the market consensus is constant, still coming in at a 'strong buy'.

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