The housing sector has underperformed the wider market in 2022 as last year's optimism evaporates. However, our head of markets sees positives in results from the country's biggest listed builder which still offers a 10% dividend yield.
Persimmon (LSE:PSN) has shown that the current clouds overhanging the housebuilding sector could soon be clearing.
There are, indeed, some concerns which the company is prepared to acknowledge. General mortgage affordability has been brought into question, although availability has not. Higher build cost inflation is an obvious bugbear, while a rising interest rate environment could exacerbate an impending cost of living crisis. Meanwhile, legacy remedial works still linger in the background while, more broadly, the current geopolitical tensions are destabilising sentiment and the UK is no exception.
Yet for all of these wider concerns, Persimmon has ploughed on regardless and is reaping the rewards of both a prudent land bank purchase scheme alongside careful management of its business. It also has some insurance from a healthy forward sales book, currently standing at £2.2 billion and has seen private weekly sales rise by 9% on the previous year, and by 22% compared to pre-pandemic levels.
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Despite the cost inflationary pressures – which the group expects to be partly offset by increased selling prices in the current year – Persimmon has managed to eke out a further gain on its operating margin, which has edged up to 28%. Its previous and prudent decision to introduce in-house supplies has reduced the pressure being seen by other housebuilders in the supply chain, such as in the availability of bricks, timber frame and tiles.
With build rates now being maintained at pre-pandemic levels, and with the strong momentum already carrying over to the current year, the cash position is unsurprisingly healthy and stands at some £1.2 billion. The company is expecting volume sales growth of 4% to 7% in the current year, thus building on its current progress. In the meantime, an increase of 9% in revenues and 23% in pre-tax profit for the year demonstrate the value of Persimmon’s strategy and confidence in outlook.
Indeed, in a continuation of its shareholder return policy, the company has maintained its current dividend payment policy. This will in turn mean that the present dividend yield of 10.1%, extraordinarily punchy in any environment let alone one of relatively low interest rates, will continue be a major attraction to investors looking either for income or simply being content to be paid to wait as Persimmon’s progress unfolds.
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The current and future amendments to the Help to Buy scheme and the end of the stamp duty holiday have patently had a limited impact on profits to date, and should remove a main area of concern which some had been experiencing around the sector as a whole. Meanwhile, the general availability of mortgages is not in doubt, and the UK’s general housing shortage should underpin further growth for some time to come.
It remains to be seen whether this performance from Persimmon is a sufficient response to the housebuilding naysayers. Its shares, which have fallen by 15% over the last year as compared to a gain of 11% for the wider FTSE100 have been tarred by the same brush, which is currently affecting most of the sector. Even so, the market consensus of the shares as a "buy" suggests that there may be better times to come.
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