PSMMF - Persimmon: High Yield Builder Still Looks Attractive

• Persimmon's first quarter wasn't great, though the outlook remains strong.
• I think the near-13% dividend yield compensates for that, although it comes with the risk of notably thin coverage.
• I find the risk:reward ratio attractive.

High-yield U.K. housebuilder Persimmon Plc ( PSMMF ) continues to attract my attention for its income potential. However, its yield, approaching 13%, could suggest trouble ahead. But while the business's performance in the first quarter was a bit weak, overall, I see no immediate cause for concern here and find the risk:reward ratio attractive.

Trading is Wobbling Slightly

The company issued a trading update this month. It was worse than I had hoped. Although forward sales are up compared to the same quarter last year, completions and revenue fell. There was a big fall in cash, too, but that reflects dividends being paid out, so does not bother me much.

Table calculated and compiled by author using data from company trading update

While the company was bullish on forward demand and ongoing resilience in the market, I would say there was a bit of a wobble here with the revenue decline. Some of that may be down to an odd Q1 last year, with buying dynamics more affected then than now by lockdown, but it will be worth watching the interim results to see whether Persimmon's revenues turn positive on a comparative basis again, and also volumes, which are an important indicator given the role of property price inflation.

Is the Dividend Sustainable?

At the moment, the dividend yield here is 12.7%. That is very high and follows a 35% drop in the share price over the past year. So, is the market signaling doubts about the sustainability of the dividend?

While coverage is thin, as I explained in my note Persimmon: Double Digit Yield From British Housebuilder , the company has a somewhat unusual policy of paying out a basic dividend and then an additional dividend as a return of excess capital. If coverage fell, it is that second dividend that would get the chop first. Currently, the ordinary dividend per share is £1.25, which on its own equates to a yield of 6.8%.

For now, the dividend looks set to stay. In its trading statement, the company said it is about 75% forward sold for the year, and the average selling price of new homes forward sold to owner occupiers is 12% ahead of last year. This is a sizeable increase I expect will help to cover inflationary impacts.

Without setting a specific forecast for the year, in the trading statement the company nonetheless sounded upbeat as this statement shows:

Demand across the UK remains strong. During the first six months of the year, the Group's average private weekly sales rate per site was around 1% ahead of that achieved during the same period in 2021. Customer enquiry levels are healthy and cancellation rates low.

For now, in the absence of contradictory indicators, I think it seems reasonable to assume that the company's earnings will come in broadly in line with last year's, supporting a dividend at roughly the same level. I was writing articles two years ago saying how attractive the Persimmon dividend yield looked, and it is significantly higher now versus the high single-digits it was back then.

The Long-Term Case for Persimmon

While there may be short-term bumps in the business, I think the long-term future remains strong. The U.K. continues to have a structural undersupply of housing, and Persimmon's profit margins are industry leading.

The bigger concern is the medium term - even if housing prices grow or are sustained for a year or two, at some point surely the worsening economy will hit them? That is what I thought two years ago and since then the market has been far more resilient than I expected. But that does not remove the essentially cyclical nature of the property market.

Right now, the shares are trading on a P/E ratio of 8. It is debt free and generating substantial free cash flows. Persimmon is highly rewarding now in terms of dividends and I expect it to be so in the long-term future too. There is a clear mid-term risk of a property market crash, but that is true for the sector as a whole and Persimmon's yield is double that of most rivals.

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