The share price of housebuilder Persimmon (LSE: PSN) was flat today, despite news of a big increase in pre-tax profit and higher profit margins.
Today, I’m going to look at the numbers behind the stock’s 9% dividend yield and ask whether the market is being too cautious. I’ll also give my verdict on another property stock with a near-9% yield.
Demand remains strong
Persimmon’s sales rose by 5% to £1.84bn during the first half of the year. Pre-tax profit was also 13% higher, at £516.3m.
This growth was driven by a 4% increase in new home sales, which rose to 8,072. Average selling prices also edged higher, rising 1% to £215,813.
Demand for new homes still seems strong. The firm’s order book rose by 6% to £2.12bn during the half year, while management bought a further 7,860 plots of land for future development.
Operating margin for the period was 27.9%, ahead of last year’s 26.5%. This impressive result helped to bolster the group’s net cash balance, which was £1,154.6m at the end of June.
Too dependent on Help to Buy?
Today’s announcement didn’t reveal how many sales were made to buyers with Help to Buy mortgages during the first half of 2018. But in 2017, 47% of the group’s sales benefited from these government loans.
The current Help to Buy programme ends in 2021. There’s no guarantee of whether the scheme will be continued, and this is reflected in today’s dividend guidance. Persimmon plans to return 235p per share to shareholders in 2019 and 2020, followed by a minimum of 110p per share in 2021.
Should you be buying?
Trading remains robust and the forecast dividend yield of 9.6% makes the stock look very cheap. But I think the market is starting to price in a housing downturn.
This year’s dividend income has been cancelled out by the 10% share price slump seen so far in 2018. And it’s worth remembering that Persimmon stock now trades at a lofty 2.7 times its book value.
I don’t see much value here, although I would rate the stock as a hold for income.
Bargain buy or value trap?
Property stocks are traditionally seen as value buys when they trade at a discount to book value. Shopping centre owner Intu Properties (LSE: INTU) fits this description. Its shares currently trade at a 48% discount to the firm’s industry-standard EPRA net asset value of 309p.
Alongside this discount, Intu stock boasts a forecast dividend yield of 8.7%. So why aren’t I buying?
The first problem is that Intu’s net asset value fell by 11% during the first half of the year. I fear this could be the first of several downgrades needed to reflect the falling rental value of many retail units.
The recent failure of House of Fraser has highlighted the problems facing big retailers. New owner Mike Ashley is certain to be negotiating lower rents on the stores he decides to keep open.
My second concern is that the group’s loan-to-value ratio of 48.7% is quite high. Falling property values and flat rental income mean that this debt ratio could easily rise further. I think a dividend cut is likely at some point.
On balance, I expect more bad news before things start to improve. So, for now, I’m avoiding this potential value trap.