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My eyes lit up when I found an income stock that’s just sparking into life after a difficult run.
FTSE 100 housebuilder Persimmon (LSE: PSN) is up 21% in just a month. That kind of bounce might put some investors off, fearing the recovery is already priced in.
But despite the rally, the shares are still up just a little over 3% over the past 12 months. That follows an incredibly volatile decade for the sector in general, and Persimmon in particular.
Today’s price of 1,350p leaves the stock at a 10-year low. In fact, we have to go all the way back to October 2014 to find a similar price.
An awful lot has happened since then, including Brexit, the pandemic, the cost-of-living crisis and now Donald Trump’s trade tariffs.
Better days returning?
Arguably, the end of Help to Buy on 31 March 2023 was the biggest blow, removing a key plank of buyer support. Also, soaring inflation didn’t just drive up mortgage rates but labour and materials costs too, squeezing both demand and margins.
Persimmon slashed its dividend in March 2023 after warning of a steep drop in completions and a hit to margins. At that point, it offered a crazy double-digit yield. Which looked lovely but wasn’t sustainable.
2024 marked a comeback of sorts, with pre-tax profit up 10% to £395.1m, while completions rose 7% to 10,664.
The board also lifted its annual housebuilding target following a big jump in its order book, boosted by changes to planning regulations.
Better still, the momentum has continued as Persimmon’s latest update, released on 1 May, confirmed a 12% increase in forward sales to £2.34bn. Land holdings now stand at 83,000 plots.
Margins under pressure
It’s still tough out there. The cost-of-living crisis isn’t over yet, while Budget hikes to employers’ National Insurance contributions and the minimum wage will squeeze margins. They came into force last month.
Housebuilders may be immune to US tariffs, but they’re not protected from the global economic cycle. UK house prices growth has now stalled.
The Bank of England is widely expected to cut rates again on Thursday (8 May), which could lift the housing market.
Analysts at Hargreaves Lansdown have pointed out one thing that sets the business apart from rivals. Its in-house materials division, which helps cut construction costs, saves the company around £5,500 per plot. That offers a real advantage if margins remain tight, and helped drive the recovery.
Valuation looks reasonable
The Persimmon share price currently trades on a price-to-earnings ratio 14.7. It’s not in the bargain basement, but that’s still below its long-run averages.
The trailing dividend yield stands at 4.44%, higher than the FTSE 100 average of around 3.5%, and appears far more sustainable than the previous overmighty payout. It’s forecast to rise to 4.62% in 2025, and 5.04% next year.
Housebuilders have endured a torrid decade. But for long-term investors seeking dividends and growth who believe in brighter times ahead (or at least, lower borrowing costs), I think Persimmon’s worth considering at today’s more realistic price.
