Housebuilding firms such as FTSE100 constituent Persimmon (LSE: PSN) have seen a spectacular reversal of fortunes since the dark days following last decade’s credit-crunch. At the end of 2008, Persimmon’s share price went below 200p, down from highs of around 1,260p just two years earlier. But today’s price close to 2,800p dwarfs that and demonstrates the progress made by the firm with the general tailwind of robust demand and cheap mortgage credit that has been blowing for so long.
Business is booming
April’s trading update confirmed that business continues to boom. In the first third of 2018, enquiry levels ran some 13% higher than the equivalent period the year before resulting in “robust” trading with “very strong” forward sales and “firm” pricing conditions across the company’s regional markets. Persimmon powers ahead like a freight train without brakes.
When will it end? My guess is the only thing likely to temper demand will be a tightening of mortgage liquidity. If customers can’t get their hands on the money to buy a new home, demand will ease and selling prices may cycle down, along with the profits and share prices of the housebuilding firms. However, there’s little sign that interest rates will rise significantly soon so, apart from the possibility of another credit-crunch event in financial markets, there seems little on the horizon capable of stopping the party.
Back in 2012, in what at the time seemed a bold move, the firm announced its Capital Return Plan setting out generous special dividend payments for years ahead. I remember reporting on it at the time and also the scepticism that many in the investment community expressed regarding the plans. Looking back, the directors’ move back then looks prescient. Not only has Persimmon met its obligations under its Capital Return Plan, it is on course to blow them out of the water.
Additional payments now planned over the next three years will push the total value of the plan to £13 per share, which is more than double the £6.20 per share set out in 2012. This income, and capital gains from the share price, have combined to make Persimmon an outstanding investment since 2012 for patient investors who held through the ups and occasional downs of the stock over that period.
Cash torrent supports dividend payments
But what about now? Persimmon appears on the top lists of FTSE 100 dividend payers, so is it worth buying the stock? At first glance, the company’s dividend-paying credentials look sound. The five-year record shows operating cash flow per share rising with a compound annual growth rate in excess of 30%. The cash coming into the business comfortably covers cash payments to investors. As long as industry conditions remain as buoyant as they are now, there’s every reason to expect the good times to roll on for Persimmon’s investors. My one nagging concern is that cyclicality could cause a swift reversal of fortunes at short notice. Although there’s no sign of economic clouds at the moment, and a cautious stance has looked ridiculous since 2012 as things have played out for investors in the stock.