Persimmon (LSE:PSN) is the UK’s largest housebuilder and has hit the headlines recently for a lot of the wrong reasons. The company achieved an operating profits of more than £1bn this year, which earned CEO Jeff Fairburn a bonus worth £110m. These are eye-watering sums of money, but the main reason this has annoyed so many people is that most of the homes Persimmon has sold have been bought with assistance from the Help To Buy scheme. This is where the government provides an interest-free equity loan to help new buyers afford a home. Therefore some of Mr Fairburn’s bonus was indirectly paid for by the taxpayer. There has been a public backlash and he has since left the company.
Sustainable profits?
I have written a lot about whether the Help To Buy scheme has artificially inflated the new-build market and the profits of housebuilders. The market seems to think so, despite the protestations of the companies involved. Persimmon has a staggering dividend of 10.8% and a price-to-earnings ratio (P/E) of 7.7. The dividend would not be this high and the P/E this low if the market thought that Persimmon’s profits were sustainable. Nevertheless it needs to be considered whether the price is really low considering the risks.
I think the share is worthy of closer inspection. The company has over £1bn in cash because of the profitability of its operations. It currently has an operating margin of 29% which makes profits extremely safe at current levels. With the amount of cash it has in the bank, I think the dividend is sustainable in the near future so the income potential for this share should outweigh the risks.
Solid income share
Aviva (LSE: AV) is another company that has a very high dividend, standing at 8.1%, again this is a case of the market anticipating the company having a fall in profits in future. I think this assessment is particularly unfair as Aviva has a good track record of paying a healthy and sustainable dividend. The dividend is easily covered by the free cashflow in the companies accounts.
Asset rich
The company is also very asset rich. Depending on your point of view, this could be a good or a bad thing as assets can be difficult to liquidate (turn into cash) so they can become problematic if they stop generating income. However, this is not currently a problem for Aviva and shareholders could be in for some bumper paydays if the company decides to start selling off some of its foreign businesses. It is currently trading below book value so you could argue that any future profits from the firm are a bonus as your initial investment is covered by assets.
Of course, a business trading below book value normally means there are investor concerns about the underlying operation. However the problem for Aviva seems mainly to be that its business is uninteresting.
Both Aviva and Persimmon can be bought in an ISA which will protect the profits from the taxman. Or you could invest in a Lifetime ISA, if you’re eligible, and the government will gift you 25% extra when you put up to £4,000 in per year. This can then be withdrawn when you reach 60 or buy your first home.