High-yielding Persimmon shows recovery potential

With Persimmon showing recovery signs, are its high-yielding shares worth a look in the current climate?

A robust summer of trading kept lowly-valued Persimmon (LSE:PSN) in the thoughts of income investors today, despite the gathering storm clouds of economic and political uncertainty.

The shares trade with a price/earnings multiple of just 6.5 times and dividend yield of 12.5%, having underperformed the housebuilding sector in recent months due to the company's well-documented issues around build quality and executive rewards.

Persimmon offered some reassurance today that its recent cultural and operational changes are having a positive impact, particularly after the customer satisfaction ratings measured by the Home Builders Federation showed improvement.

The refocusing of the group around a customer-first strategy impacted today's half-year results, although profits of £509.3 million were slightly ahead of City expectations. Customer service spend increased by about 40% year-on-year, while a decision to hold back the release of some sites so customers are given more accurate moving-in dates helped to reduce sales volumes.

"Allowing for these impacts, Persimmon's trading in the first half of 2019 was strong," new chief executive Dave Jenkinson said today.

The commitment to a more customer focused service performance is particularly significant if it safeguards the group's position in the government's Help to Buy subsidy scheme.

Shares were little changed at 1860p today, despite a number of City brokers reiterating their "buy" recommendations on a stock that's fallen 25% since March. Analysts at Canaccord Genuity, who have a price target of 2,720p, said:

"Valuation looks attractive to us, with a dividend yield of 12.5% supported by a strong balance sheet and cash generation."

As well as the recent share price weakness, the lofty dividend yield reflects the impact of Persimmon's decade-long capital return plan.

The group made a long-term commitment in early 2012 to deliver £1.9 billion or £6.20 per share of surplus capital to shareholders over 10 years to 2021, which was similar to the market capitalisation at the time. The total value of the plan has subsequently risen to £13 per share.

Brexit remains a key worry for investors, although Persimmon is protected to some extent by its limited exposure to the London and South East market.

Ahead of the autumn selling season, Jenkinson added that he was encouraged by the level of customer activity through the quieter summer weeks. High levels of employment, low interest rates and competitive mortgage rates are all factors supporting consumer confidence.

He added:

"Whilst uncertainties persist regarding the future trajectory of the UK economy consumer confidence remains resilient. Customers are continuing to make carefully considered reservation commitments and cancellations continue to run at historically lower levels."   

Analysts at Bank of America Merrill Lynch and Liberum have "buy" recommendations at 2,420p and 2,800p respectively, while Peel Hunt is at 2,025p.