Persimmon's share price rally hits brick wall

Hopes of a soft Brexit or no Brexit at all have driven demand for housebuilders whose high-yielding shares look cheap. Richard Hunter, head of markets at interactive investor, tells us what he thinks.

Persimmon (LSE:PSN) has delivered another strong update, but the potential of a wrecking ball continues to overhang the sector.

With one large exception - in the form of the fallout, whatever it may be, from Brexit – the housebuilders find themselves in a sweet spot at the moment. The lack of housing supply has been recognised by the government, particularly with regard to the recently extended Help to Buy scheme, with further tailwinds coming in the form of improving employment numbers, historically low interest rates and ample mortgage availability. 

As such, the likes of Persimmon are generating cash at an accelerated pace, enabling the continued payments of special dividends. Indeed, Persimmon's projected dividend yield of 10.5% remains of significant attraction to income-minded investors. 

Wobbles generally in the UK housing market have not yet filtered through, with average selling prices in 2018 edging up 1%, while group revenues have improved 4% and, of equal comfort, forward sales are also up 3%. 

Meanwhile, the company is taking a selective approach in terms of its land replacement policy, its manufacturing capability is improving via its "Brickworks" and "Tileworks" units, and full-year pre-tax profit is estimated to be modestly ahead of expectations.

Source: TradingView (*)  Past performance is not a guide to future performance

Unfortunately, the sector is squarely in the firing line because of Brexit and the potential damage it could wreak on the UK economy, and early share price gains were quickly lost on Tuesday. 

Quite apart from the possibility of the country spinning into an immediate economic downturn, any ongoing weakness in sterling could well lead to a further increase in the cost of materials. This comes in addition to a housing market which is slowly starting to come off the boil. 

The special dividend payments have come at a cost, with net cash down 20%, although the company remains in a comfortable position to be able to fund the previously announced further returns to shareholders.

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The shares have endured a difficult period given the uncertainty, having dropped nearly 11% in the last six months. 

Over the last year, a decline of 16% compares to a dip of 12% for the wider FTSE 100 and, with the market being rather more positive on Taylor Wimpey and, in particular, Barratt Developments, the general view of the shares as a ‘strong hold’ could well remain in place, despite Persimmon's best efforts.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.