UK housebuilders have been savaged in 2022. Persimmon (LSE: PSN) shares, for example, had tumbled 58% by Friday’s close.
That gets my inner contrarian twitching. Is this now a wonderful opportunity to load up?
Temptingly cheap
One reason to think this might be the case is that Persimmon already trades at just five times forecast earnings. That’s seriously cheap relative to the UK market as a whole.
Currently, Persimmon shares also boast a monster 19% forecast dividend yield. When even the best instant-access cash savings account still only generates a paltry 2.75% in interest, that’s got to be worth the added risk that comes with buying stocks and shares, right? After all, it would cover inflation (10.1% in September) and then some.
Aside from having an emergency fund, locking money up in the bank doesn’t appeal. But things aren’t quite that simple.
How safe is that payout?
One of the challenges facing any investor wanting income is judging the odds of actually receiving that income. Sadly, there can be no guarantees. As a general rule however, a sky-high dividend yield is usually something to be wary of rather than embraced. It’s often just the result of a company’s share price falling because the market is concerned about what’s coming.
I think this is true to some extent here, even though Persimmon had a higher-than-average yield long before the multiple crises of 2022 unfolded. The economic background is hardly bullish for the sector, especially if interest rates keep climbing. The latter, when combined with squeezed incomes, will likely put (some) people off buying a new home. That doesn’t bode well, especially as earnings at Persimmon are expected to only just cover this year’s total cash return.
So I do think there’s a real risk that Persimmon might reach for the scissors. The question I’m asking is how much this would bother me?
In better health
My personal view is that what’s happening in 2022 doesn’t feel like a repeat of what came to pass during the Great Financial Crisis. Back in 2007, housebuilders saw their valuations plummet as their very survival was under question. These days, the balance sheets of the UK’s biggest builders — including Persimmon — are looking far more robust.
Because of this, I can’t see dividends being wiped out completely. Even if a cut were made, there’s a good chance that the stock will still generate a sizeable amount of passive income and probably a lot more than they’d get from a bog-standard FTSE 100 tracker.
Of course, one advantage of holding the latter over Persimmon shares would be the diversification that it brings. “You pays your money and you takes your choice“, as the saying goes. This is why correctly judging my own tolerance to risk is so vital.
Watchlist-bound
All things considered, I’m tempted to buy at the current level. However, this would be conditional on me being able to accept that the share price could have further to fall and the dividend stream might be reduced.
If I were to dip my toe in, I’d also wait until after the firm’s next trading update, due 8 November. For now, Persimmon goes on my watchlist.