The Persimmon (LSE: PSN) share price has crashed by a whopping 55% over the past 12 months, after an earlier strong recovery from the pandemic.
The reasons seem clear. Rising interest rates are making mortgages more expensive, which should put a squeeze on the property market.
Tax cuts
Then new chancellor Kwasi Kwarteng’s unprecedented tax cuts have caused the pound to slide. And that means the Bank of England (BoE) is now more likely to raise interest rates even higher to protect it from further damage.
The BoE has already said it will not hesitate to do whatever is necessary. And some commentators are still convinced that an urgent meeting and an emergency rise are on the cards.
Oh, and a weaker pound means imported goods become more expensive, pushing up inflation even more, which leaves less money in the pockets of potential homebuyers.
Some mortgage lenders are already withdrawing some of their mortgage offers, and I suspect more will do the same. So what should a poor Persimmon shareholder, like me, do?
What would Warren Buffett do?
There’s a quote by billionaire investor Warren Buffett, and it might be my new favourite:
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
We certainly have dark economic skies right now. But what’s the gold they’re raining? It’s cheap shares. In particular, cheap housebuilder shares. Cheap Persimmon shares, even.
Cheap valuation
The current Persimmon share price gives us a trailing price-to-earnings (P/E) ratio of under 5.5. The long-term FTSE 100 average is close to three times that.
We’re also looking at a forecast dividend yield of a massive 17%. That includes a continuing special dividend as the company hands back excess capital, and I wouldn’t put too much trust in that right now.
But even last year’s ordinary dividend, if repeated, would yield 10% on today’s share price. The company could cut that by half to deal with any crisis, and still offer more than the average FTSE 100 dividend yield.
Now, if something looks like a no-brainer buy, there must be a downside, right? Yes, there is.
Housebuilder slump
The housebuilding business tends to go through cycles. And in the past, investors have been very unforgiving when it’s been in a down phase. I don’t expect things to be any different this time. And if high interest rates continue for very long, the sector could be facing couple of years in the dumps.
An investor buying Persimmon shares now could very well see their shares falling further in the next 12 months.
And then, I can’t have the same confidence in the dividend that I’ve had in recent years, which is what I buy housebuilder shares for.
On balance, then, will I buy more? If the Persimmon share price stays this low, next time I have a chunk of cash to invest, I probably will. Unless I go for Taylor Wimpey shares instead.