Shares in FTSE 100 housebuilder Persimmon (LSE: PSN) have fallen by a whopping 50% over the last year.
Persimmon’s share price is now lower than it was during the March 2020 crash. In fact, the company’s shares haven’t been this low since the Brexit slump in 2016.
I’ve been taking a look at Persimmon as a possible buy for my portfolio. With the shares currently trading on six times forecast earnings and offering a 16% dividend yield, there are some obvious temptations.
However, I’d have to be living on Mars to ignore the economic risks the business could face over the next year. So what should I do?
What we know today
Rising interest rates and the cost-of-living crisis are affecting a growing number of Britons. But according to Persimmon, the company’s customers are not yet being seriously affected.
Sales during the first half of the year were held back by planning delays, but the company says it’s on track to deliver at least 14,500 completions in 2022, unchanged from 2021.
More than 90% of homes due for completion this year have already been sold. Cancellation levels “remain low”, according to CEO Dean Finch.
Problems in the pipeline?
Persimmon expects to complete more than 7,800 homes during the second half of this year, compared to 6,652 during the first half. This suggests to me that if the company fails to clear its backlog as quickly as expected, some completions could slip into 2023.
This could cause two problems. Sales and profit for 2022 would be lower than expected. And if the UK does fall into recession, I’d guess that cancellation rates may rise in 2023, as buyers decide against the risk of moving.
I think there’s another risk too. The UK housing market has been distorted over the last decade by ultra-cheap mortgages and the Help to Buy loan scheme.
Interest rates are now rising and Help to Buy is ending. Are we finally going to see a return to ‘normal’ housing market conditions?
If we do, then buyers could struggle to get the same mortgages they could have had 18 months ago. That might lead to lower selling prices for Persimmon, putting pressure on profit margins.
Persimmon shares: what I’m doing
This is a tough time to make predictions about the UK housing market. I don’t know what will happen next.
However, unemployment is still low. So are mortgage rates, historically speaking. In addition, the UK housing shortage isn’t going to disappear overnight. I think people will still want new homes and be willing to buy them.
On balance, I’m starting to believe that some housebuilding stocks offer value at current levels.
However, I’m not convinced Persimmon is the best buy in this sector. The company’s giant dividend is barely covered by forecast earnings, which are expected to fall next year. I think the payout will probably be cut over the next year or so.
I also think there’s a growing chance Persimmon could miss its 2022 and 2023 profit forecasts. That could cause further share price falls.
For these reasons, I’m not planning to buy Persimmon shares at the moment.