Persimmon: 10% dividend yield plus re-rating potential

It's among the best income stocks around, but what should investors make of this latest trading update?

For a company that recently broke the £1 billion profits barrier and whose dividend yield is a chunky 10%, Persimmon (LSE:PSN) doesn't sound in particular need of a rebuilding job.

But the reality for the FTSE 100 housebuilder is somewhat different, with today's trading update highlighting its efforts this year to improve a reputation battered by recent rows over executive rewards and complaints over build quality.

The result of these actions is that Persimmon's weekly private sales rate since the start of the year has fallen by 5% as the company focuses on initiatives to improve customer satisfaction. The measures have included providing greater accuracy on anticipated moving-in dates by selling homes on high-volume developments later in the construction cycle.

This commitment to a more customer focused culture and service performance should reap rewards in the long run, particularly if it safeguards the group's position in the government's lucrative Help to Buy subsidy scheme.

Source: TradingView   Past performance is not a guide to future performance

In the meantime, however, the order book is down 3% on a year earlier to £2.7 billion and the company is operating from 350 active sales outlets, compared with 375 a year earlier. 

Costs are also expected to be 4% higher this year, which includes ongoing investment to support improved levels of customer satisfaction. But pricing conditions remain firm across regional markets, which has meant a slight increase in the average selling price to £237,850.

UBS analyst Gregor Kuglitsch believes this points to margins only slightly lower than last year's 30.8%.

He added:

"We think this is a benign cost to improving customer care scores and a far cry off some market participants' expectation of a major re-set."

Kuglitsch believes the shares are attractively valued and can recover to 2,650p, which is a level last seen in June. The dividend yield of just over 10% continues to be a major attraction as part 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 strength of recent trading conditions means the total value of the plan has subsequently risen to £13 per share.

The latest payment of 125p a share or £398 million was made as an interim dividend in late March, with Persimmon also recommending a return of 110p or £350 million as a final dividend to be paid on July 2.

Despite this, shares have endured a difficult time due to the uncertain economic backdrop. The stock did rally sharply in early January but has been moving sideways ever since.

Persimmon allayed market fears about Brexit uncertainty in today's update by reporting continued resilience in the new build housing market, with high levels of employment and low interest rates still supporting consumer confidence.

The group said:

"With mortgage lenders continuing to offer attractive products, the level of customer activity has been encouraging with visitor levels to site, sales conversion rates and cancellation rates all running in line with our expectations."