Investors ignore this FTSE 100 stock’s massive dividend

13th January 2022 15:23

It’s a recognised income play, but no one’s buying that story today. We explain why and look at the startling share price collapse of a famous name.

A 9% dividend yield and robust trading outlook failed to swing investors the way of Persimmon (LSE:PSN) today as the new year caution towards large-cap housebuilders continued.

Persimmon's end-of-year update was broadly in line with expectations, but its shares still fell 2% or 49p to 2,574p, leaving the blue-chip stock 10% lower over the past week.

Housebuilders' valuations are currently near to cycle lows, having been hit by the headwinds of rising interest rates, build-cost pressures and government policies.

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The prospect of future shareholder returns being diverted to settle the industry's cladding crisis sent many shares sharply lower on Monday as housing secretary Michael Gove set a March deadline for builders to come up with a “fully funded plan of action”.

Today's weakness wasn't helped by FTSE 250-listed Countryside Properties (LSE:CSP) reporting a big drop in the number of completions for its core Partnerships division in the final quarter of 2021.

The company, which delivers developments in conjunction with local authorities and housing associations, added that operating profits for the period more than halved to £16.5 million. Its shares sank 25% as chief executive Iain McPherson also quit.

In contrast, Persimmon said its performance had been excellent throughout 2021 as it delivered 14,551 homes at an average selling price of £237,000, up 7% and 3% respectively on 2020 levels. it also maintained an “industry-leading” operating margin of 28%.

The group has started the new year with total forward sales of £1.62 billion, which is up 20% on the more comparable 2019 level. While the planning system continues to present challenges, Persimmon expects to open 75 new outlets in the first half of the year.

On the outlook, it said the fundamentals of the housing market were supported by resilient consumer confidence, demand outstripping supply and good levels of mortgage availability.

Several analysts showed their continued support for the stock today, with Peel Hunt holding a price target of 3,300p and UBS seeing a potential upside to 3,015p.

Bank of America raised its 2022-23 earnings per share estimates by 1%-2%, prompting it to lift its price target to 3,400p from 3,350p.

BoA analyst Arnaud Lehmann said: “We expect 2022 to be a year of volume acceleration and resilient underlying demand.

“We believe that the group is very well positioned to continue to outperform its sector peers, supported by a very strong land bank, quality of execution, and a large cash position supporting cash returns.”

The stock offers a 9% dividend yield and trades at less than 10 times 2022 earnings, which is below the long-term average of 11 times despite the stronger company fundamentals.

Persimmon returned 235p a share in 2021 and has said it intends to stick with its usual pre-Covid profile of two payments a year, starting with the regular 125p in early July 2022.

Liberum currently has “buy” recommendations on all nine stocks in the sector, the first time it has done so since 2008. It noted that shares are similar to levels seen in January, when an unemployment rate of 7% was being forecast compared with today's 4.2%.

Liberum also believes the level of selling price inflation should be good enough to at least recover build cost inflation.

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