Persimmon (LSE:PSN) shares have actually been pushed higher over the past month. Not by many, but enough to make investors think the stock is likely headed lower.
I haven’t paid much attention to housebuilder stocks in recent months, but at the end of a cycle of monetary tightening, it may be time to reconsider.
So let’s take a closer look at persimmons. Would it have been a good investment in recent years? And is it a good investment now?
If I had invested £1,000 in Persimmon shares two years ago, today I would have £405, plus dividends. During that period the dividend would have been substantial – about £140. However, this may not go far enough to make up for the share price loss.
But to make matters worse, Persimmon actually cut its index-leading dividend in the fall. The firm announced that “Ordinary dividends will be set at a level that is well covered by after-tax profits“. This would mean a massive 18% yield cut. For many, this was surprising but not positive news.
What made it worse for me was the fact that I believed the dividend was affordable, based on misjudgment of persimmon for its fire protection promise.
In early 2022, the housebuilder said it would cost £75m to reattach homes deemed unsafe after the Grenfell disaster. Fast-forward to the end of the summer, Persimmon raised its estimate to £350m. This figure is 40% of pre-tax profit in 2021/2022.
Currently, the dividend yield is around 4.8%.
What happens now?
Well, Persimmon is trading near its low point for the last 10 years – it’s about the same guys. Thus, I think it is time to rethink the field. And there are many reasons for this.
Analysts expect interest rates to moderate in the coming years, starting in H2. High interest rates have made potential home buyers postpone their purchases and we are likely to see increased demand when rates moderate.
Inflation is also moderate, and this is significant from a cost perspective. Six months ago, investors saw interest rates rising, house prices stagnating and inflation running towards 10% – so they fled the sector. The prognosis is very positive from now on.
Due to these factors, HSBC It recently upgraded its stance on a host of homebuilders, arguing that the slowdown in the housing market is outweighing share prices.
“We now have greater visibility into homebuilders’ profitability and cash flow and their recovery from the size of the current housing market downturn, which we believe is more than priced into share prices.“, said HSBC.
So can I buy persimmon stock? Actually, no. I already own shares of it and I am not adding to my position.
I am focusing on home builders with partner businesses, standard commercial operations, eg Wistry. Sharing essentially means affordable housing and there is more flexibility here.
Despite the improvement situation, I like the security that a partnership business provides.
The post If I had invested £1,000 in Persimmon shares 2 years ago, what would I have now! appeared first on Motley Fool UK.
James Fox has positions in Persimmon plc and Wistry Group plc. Motley Fool UK has no position in any of the shares mentioned. The views expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our membership services such as Share Advisor, Hidden Winner and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023