The FTSE 100 and other indexes have been pushing downwards over the past couple of weeks. In fact, UK stocks tanked on Friday after the new chancellor’s first mini budget. And all this has served to push yields up. One stock that has struggled in recent months is housebuilding giant Persimmon (LSE:PSN).
Persimmon already had the biggest yield on the FTSE 100, but with the stock down 38% over the past six months, the yield has exploded, and now stands at 17.5%.
So, let’s take a closer look at this dividend giant and explore whether it might be right for my portfolio.
Big yields, can they be trusted?
Dividend yields relate to a company’s share price and demonstrate the percentage of the stock price that it pays out in dividends each year.
After a particularly good year, some companies will pay their shareholders a bumper dividend, but in the long run, the payouts will return to normal. Sometimes the yield might be artificially high as the share price has been on a downward trajectory, reflecting investor concerns.
The problem is that while giant yields can appear attractive, they’re normally not sustainable.
Persimmon’s dividend
Persimmon has paid out 235p per share in 2022 and is expected to pay 225p in 2023. At the current share price, that means Persimmon has a 17.5% yield in 2022 and a likely 17% yield in 2023.
In 2021, the dividend coverage ratio — the number of times a company can pay dividends to its shareholders using its net income — was 1.06. That’s not very strong. This means that Persimmon only just had enough earnings to cover its dividend payments.
With business performance in 2022 slightly behind 2021, it is likely that coverage will be lower again this year. As such, there could be cause for more downward pressure on the dividend.
Prospects will improve
House builders are experiencing some challenges right now, and this explains why the Persimmon share price is trading at its lowest level in nine years. Rising interest rates are likely to make potential buyers postpone their purchasing decisions. In turn, house prices are expected to stall while cost inflation is running near 5%. Collectively, these factors will likely squeeze margins over the next year.
However, we’ve just seen stamp duty cut and in the medium term, I’m confident demand for new homes will pick up again. After all, the UK has an acute shortage of housing.
And Persimmon is among my top two house builder stock picks in the UK — the other is Vistry. The reason being that Persimmon is less impacted by the fire safety pledge than other housebuilders. Persimmon puts its cost of recladding homes at £75m, approximately 10% of profits in 2021. Some housebuilders will lose a year of profits.
So with Persimmon trading around £13.50, down 50% over the past 12 months, I think this house builder has fallen far enough. I already own this stock, but at the current price I’d buy more.
In the long run, I’m confident that prospects will pick up. But, in the meantime, I’m happy to take the sizeable dividends. Even if the payment were halved, the yield would still be double the index average.