Image source: Getty Images
I’ve got my eye on a beaten-down FTSE 100 income stock that’s finally showing signs of life. Like the rest of its sector, housebuilder Persimmon (LSE: PSN) has been struggling for years. Are events finally turning back in its favour?
Housebuilding stocks were hit hard by the shock Brexit vote in 2016, crashing 40% in the bewildered aftermath. They haven’t really bounced back since.
For me, Brexit was just a sideshow. The underlying problem is that house prices soared in the era of near-zero interest rates, putting them beyond the reach of many buyers. When inflation rocketed in 2022 and mortgage rates flew past 6%, prices looked even further out of reach.
Persimmon shares could recover
The government also removed a key demand prop, pulling the popular Help to Buy scheme in 2023. Help to Buy was accused of using taxpayer funds to underpin housebuilder profits, and given subsequent sector performance, there’s may be some truth in that.
The Persimmon share price is down 50% in the last five years, a pattern that can be seen across the sector. Is that about to change?
The Bank of England (BoE) has cut base rates five times since the August 2023 peak of 5.25%, and banks have been cautiously cutting mortgage rates as a result.
It’s starting to have some effect, with Persimmon shares finally stabilising. They’re up 19% in the last three months, although the 12-month growth figure is just 3%. They could get another lift on Thursday (18 December) if the BoE cuts base rate again as expected.
Dividends and growth potential
Markets reckon there’s a 92% chance of cut of a 25 basis point cut to 3.75%. Some think the BoE could go further and cut to 3.5%. Given its habitual caution, I think that’s unlikely.
Still, more rate cuts are expected next year, with HSBC forecasting that bank rate could end 2026 at just 3%. That should drive down mortage rates, revive buyer sentiment, and push up prices and housebuilder profits. The predicted slide in inflation would help, cutting the cost of labour and materials.
After its troubles, Persimmon looks good value with a price-to-earnings ratio of just over 14. The trailing dividend yield is pretty handy at 4.6%.
Looking good value
A word of warning. That rising yield is mostly due to the falling share price. In 2020, Persimmon paid a total dividend of 345p. The board cut that to 235p in 2021, then slashed it to just 60p in 2022, and held it there in 2023 and 2024.
Persimmon’s struggles may understandably put some investors off, but brave contrarians might just see this as an opportunity. Homes, after all, are in short supply.
It’s not a racing certainty though. The UK economy’s struggling, the jobs market is tough and many young people have given up on the idea of home ownership altogether. A 0.25% base rate cut’s already priced in. Despite these challenges, I think I still think Persimmon is worth considering, with a long-term view.
Other FTSE 100 stocks should also benefit as monetary policy eases. Now let’s see what Thursday brings.
