Persimmon (LSE: PSN) is the UK’s second-largest housebuilder. It’s certainly an alluring investment prospect for passive income seekers. The FTSE 100 dividend stock has rewarded shareholders with 8.2+% annual dividend yields every year since 2018, except 2020 amid the onset of the pandemic.
The Persimmon share price is down 22% in 2022, which has helped to drive up the dividend yield. The stock’s ex-dividend date is looming on 16 June and an interim dividend payment will be distributed on 8 July. So, would Persimmon shares make a good addition to my portfolio in June? Let’s explore.
An inflation-busting dividend stock
Inflation is running hot. The CPI index soared 9% in the latest figures. At 10.5%, Persimmon is one of only two FTSE 100 stocks with a sufficiently high dividend yield to beat rising costs at present (the other is metals and mining corporation Rio Tinto). Encouragingly, Persimmon’s dividends look sustainable to me, which isn’t always the case with high-yielding equities.
Persimmon’s price-to-earnings (P/E) ratio of 9.14 makes it a reasonable value buy in my view. Although it’s worth noting this is slightly higher than those of its competitors Taylor Wimpey (8.68) and Barratt Developments (7.98).
Measuring the York-based housebuilder against its key performance indicators reveals healthy financial numbers for the company. New housing revenue was up 10% in 2021, just shy of £3.5bn. In addition, underlying pre-tax profit rose 13% to £973m.
Crucially, it’s a highly cash-generative business. Free cash generation stood at £766m last year, up 2% on 2020. A strong balance sheet and liquidity are important features for me when analysing a dividend stock. Persimmon ticks these boxes in my view, strengthening the long-term bull case for the stock as a passive income generator.
Headwinds for Persimmon shares
The Persimmon share price is significantly impacted by developments in the UK real estate market. Indeed, the company acknowledges this comes with risks, stating: “The UK housing market is cyclical in nature and subject to fluctuations in economic conditions and changes in the political, regulatory and legislative environment“.
The average price of a British home stands at £250,000 for the first time, according to Zoopla‘s latest market survey. However, as interest rates rise, mortgages will become more expensive. This could precipitate a slowdown in the UK housing market and, by extension, in the Persimmon share price.
Nonetheless, fears of a property market crash could be overblown. There’s still a substantial shortage of homes to meet demand, with an estimated shortfall of 1.26 million homes in England since 2010. The government still has an ambition to build 300,000 new homes per year.
Persimmon boasts a substantial £3.63bn in net assets, coupled with an impressive 35.8% return on average capital employed in 2021. While this stock is susceptible to a housing market downturn, it’s robust enough to withstand one in my view.
Would I buy?
Strong recent financial results and a reliable dividend history give me confidence in the bull case for Persimmon shares. While the dividend yield is the Footsie stock’s star appeal, I believe the drawdown in the Persimmon share price over the past five months also creates opportunities for capital growth. I’d buy the stock before the ex-dividend date with long-term future returns in mind.