The huge gulf between housing supply and first-time buyer demand in the UK convinces me that Persimmon (LSE: PSN) should remain a lucrative payout-pick long into the future.
The homebuilder enjoyed a 23% leap in underlying pre-tax profit last year, to £782.8m, with revenues rising 8% to £3.14bn.
Gold dust
Persimmon announced forward sales of £1.89bn as of the close of February, up 9% year-on-year and underlining the strength of British homebuyer appetite. The business noted that the newbuild market “remains confident with customer demand for new homes supported by compelling mortgage products.”
Against this backcloth the City expects Persimmon’s earnings to keep on growing, albeit at a less impressive rate than in previous years, as house price growth cools.
For 2017 the number crunchers predict a 2% earnings rise, and a 3% advance is predicted for 2018. Whilst hardly attractive for growth investors, the probability of further bottom-line expansion is gold dust for dividend chasers.
Indeed, these projections are anticipated to deliver a dividend of 118.3p per share in 2017, up from 110p last year, which would be an incredible 5.7% yield. And while Persimmon’s total payout is expected to fall fractionally in 2018, to 117.9p, the yield remains unchanged.
And investors should put great faith in these estimates being realised in my opinion. Dividends are covered 1.8 times by anticipated earnings through to the close of next year, just below the broadly-regarded benchmark of 2 times representing premium security.
However, these readings are far from shocking, and Persimmon’s exceptional cash generation should provide added peace of mind. The construction colossus saw net cash clock in at £913m as of December, up from £570.4m a year earlier.
Brand behemoth
Whilst British American Tobacco’s (LSE: BATS) products may not be as ‘necessary’ as those of Persimmon, the addictive nature of their traditional goods has long made it a popular selection for investors seeking reliable earnings — and therefore dividend — expansion.
But the evergreen popularity of British American Tobacco’s goods, regardless of broader pressure on consumers’ wallets, is not the factor that makes the business a reliable dividend grower. The company’s pan-global presence gives it access to major markets like the US and fast-growing emerging regions, a situation boosted by its takeover of Reynolds American.
The City expects these qualities to deliver earnings growth of 16% and 7% in 2017 and 2018 respectively, driving the dividend to 187.7p and 201.9p per share for these years. As a result, British American Tobacco sports jumbo yields of 3.7% for 2017 and 3.9% for next year.
Dividend coverage stands at a less-robust 1.5 times for this year and next. But British American Tobacco has the required balance sheet strength to make good on these projections, in my opinion, even if debt levels have risen over the past year. Free cash flow still rang in at a considerable £3.4bn last year.