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Leading housebuilder Persimmon (LSE: PSN) is one FTSE 100 stock that’s come across my radar. At face value, the company looks to be trading at a relatively cheap price-to-earnings (P/E) ratio and has a chunky dividend.
After several turbulent years for UK builders, it got me wondering if it’s time for value investors to reconsider investing in the beaten-down company.
What’s happening to the Persimmon share price?
The stock is trading at £10.88 as I write on 28 August, having fallen over 35% in the last 12 months. That gives the company a P/E ratio of 13.7, which is around the Footsie average and cheaper than the competitors like Taylor Wimpey.
Operationally, the company’s numbers for the half-year ended 30 June were solid. Completions rose by 4% to 4,605, average selling price climbed to £284,047, and underlying operating margin held at 13.1%.
In good news for shareholders, management reiterated guidance for 11,000–11,500 homes this year and around 12,000 in 2026.
It wasn’t all good news, however, with management’s outlook that margins may recover gradually dampening the result.
One factor that is in the company’s favour is the falling Bank of England base rate. The central bank has trimmed the key rate to 4%, reducing mortgage costs and potentially providing a much-needed boost to housing activity.
The Competition and Markets Authority (CMA) has also reached an agreement with Persimmon and six other housebuilders over potential breaches of competition law.
However, the company says affordability remains a hurdle for many potential customers, while uncertainty around property taxes and stamp duty continues to linger.
Solid dividend
While the company’s shares are trading near the Footise average, it does boast a superior dividend yield to the broad market index. Management declared an interim dividend of 20p and intends to at least maintain last year’s total dividend of 60p.
Persimmon’s forward dividend yield of 5.4% is above the Footsie average of 3.5%. That’s good news for value investors like me who like a bit of income.
There are two key questions that I think investors should ask when it comes to Persimmon (or any value stock!).
Firstly, is it a strong company with a clear pathway to earnings and cash flow generation moving forward? And secondly, is the current share price a good entry point to generate returns as a buy-and-hold investment over the medium to long term?
My verdict
There’s plenty to like. Completions and the order book are moving the right way, pricing has held up, and interest rates are drifting lower. Those are all positive factors that could aid a recovery after a tough few years.
However, I think the risks are still too high right now. Affordability remains stretched, build-cost pressures are still hanging around, and policy uncertainty could have an impact on future growth.
The potential overhang and costs associated with the CMA investigation are an extra headache. Then there’s also the chance that if margins are slow to recover, the current share price may not be as cheap as it appears.
All in all, while Persimmon could do well from here if the economy holds up, it is still a cyclical stock tied to the economic cycle. Alternatively, investors could consider more defensive dividend stocks like National Grid (4.5% yield) that have potentially less cyclical exposure.
