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Having crashed 57% since November 2020, the Persimmon (LSE:PSN) share price has been the second-worst performer on the FTSE 100 over the past five years. Post-pandemic interest rate hikes have choked off the demand for new houses and stubborn supply-chain inflation has eroded the group’s margin.
However, with the cost of borrowing starting to come down, I think investors could consider adding the stock to their portfolios.
Green shoots of a recovery
Since the base rate reached a post-Covid high of 5.25% in August 2023, the Bank of England has made five cuts of 0.25% each.
More recently, four of the nine-person monetary policy committee voted for a reduction at November’s meeting. This has raised expectations that a pre-Christmas cut will be announced on 18 December.
As expected, the 1.25% reduction in the base rate has resulted in a drop in mortgage rates, which in turn, has led to an increase in the demand for new loans. I think it’s significant that the actual rates charged on new loans are now at their lowest level since January 2023. Borrowing in September was at its highest since March, when there was a rush for new loans ahead of stamp duty changes.
Current (18 November) yield curves suggest the base rate could fall from 4% to 3.5% over the next six months or so.
If the market conditions do continue to improve, Persimmon could be one of the biggest beneficiaries. Its average selling price is cheaper than its rivals, which suggests it’s likely to see a faster increase in sales than its peers.
A bigger picture
But the group’s not out of the woods just yet. Next week’s Budget is likely to be a tax-raising one and could result in a further squeeze in incomes. Although the government’s trying to pursue a pro-growth agenda and encourage housebuilding through a series of planning reforms, the state of the nation’s finances means there’s a risk that some of the anticipated benefits of these polices could be undone.
Despite this, analysts remain optimistic. They have an average (consensus) 12-month share price target of 1,480p, which is approximately 20% higher than today’s price. In addition, they are expecting dividends of 62p a share. This is a far cry from the 235p it paid in 2022. But we live in different times now and it’s a reminder that there can never be any guarantees when it comes to payouts.
If these estimates are correct, it means a £10,000 investment could turn into £12,614 by November 2026. This is an overall return of 26%. I’m sure most investors would be happy with that. For context, Microsoft‘s stock price has risen by ‘only’ 19% over the past year.
Final thoughts
Personally, I remain hopeful that the Persimmon share price will do better than this. After all, just over a year ago, the group’s stock was changing hands for 36% more than it is today. This month, the housebuilder confirmed that it remains on track to deliver 11,000-11,500 completions this year. And despite its recent struggles, Persimmon remains debt free.
That’s why I think it’s one to consider although I acknowledge that it’s not the only business building momentum in the sector.
