The Persimmon (LSE:PSN) share price is currently 60% lower than it was during the summer of 2021.
And to my surprise, the shares are now trading for 20% less than they were in April 2020, when building sites across the country were closed due to Covid-19.
When the stock was last at £30, the base rate was 0.1%, the company’s dividend was 235p, and the run rate for mortgage approvals was over 200k a quarter.
Will these good times return soon?
Period
UK house completions
UK mortgage approvals
Persimmon share
price (£)
Base rate (%)
Q1 2020
34,940
190,684
19.17
0.10
Q2 2020
16,880
60,780
22.86
0.10
Q3 2020
36,800
229,314
24.73
0.10
Q4 2020
43,260
295,958
27.67
0.10
Q1 2021
47,190
249,011
29.40
0.10
Q2 2021
44,930
227,396
29.59
0.10
Q3 2021
43,290
199,400
26.68
0.10
Q4 2021
42,410
201,213
28.56
0.25
Q1 2022
42,850
205,883
21.51
0.75
Q2 2022
52,040
181,091
18.63
1.25
Q3 2022
43,140
189,189
12.38
2.25
Q4 2022
39,220
141,106
12.17
3.50
Q1 2023
Not available
81,135*
12.56
4.25
*January 2023 and February 2023 only
Interesting
To try and tame inflation, the Bank of England (BoE) has increased interest rates 11 times in 17 months. This has affected disposable incomes and confidence in the housing market, with mortgage approvals currently half what they were in the last quarter of 2020.
The International Monetary Fund recently predicted that interest rates will fall to pre-pandemic levels once inflation is sustainably lower. The BoE expects inflation to be back below its 2% target by early 2024.
If correct, history tells me that consumer confidence will then return and people will want to buy houses once more.
Reaping dividends
Persimmon shareholders have enjoyed some generous returns in recent times.
When the company’s share price was last above £30, the annual dividend was 235p, giving a yield close to 8%.
Earlier this year, given the uncertain economic outlook, the payout was cut to 60p. The shares are now yielding around half what they were in 2021. But they are still above the FTSE 100 average.
Last week, the directors announced that they are expecting to sell (complete) around 9k homes in 2023. Assuming an average pre-tax profit of £65k per house, this would give earnings this year of £585m.
Based on the current number of shares in issue, a 60p dividend will cost £192m.
Persimmon has a reputation for returning a large proportion of its profits to shareholders. For example, in 2020 its dividend was equivalent to 96% of pre-tax earnings. This makes me think that the directors are being cautious. I wouldn’t be surprised to see a hike in the dividend to around £1 a share.
But we are a long way from seeing a payout of 235p, which would cost around £750m.
Financial year
Revenue (£m)
Underlying profit before tax (£m)
Completions
Pre-tax profit per completion (£)
2018
3,738
1,091
16,449
66,314
2019
3,649
1,048
15,855
66,105
2020
3,328
863
13,575
63,580
2021
3,611
967
14,551
66,442
2022
3,816
1,007
14,868
67,696
The good times are coming again
I see no reason why Persimmon shares will not reach £30 again. But it may take a few years.
I believe the company will want to be building at least 14,000 houses a year before the dividend is restored to 2020 levels. And this probably won’t happen until 2025 at the earliest.
I expect an increase in completions from current levels will be driven by lower interest rates on the back of falling inflation. And with an election due before January 2025, all political parties will be looking to attract voters. I’m sure promises will be forthcoming of new schemes to help first-time buyers to get on the housing ladder. This should also help reignite the market.
I already own shares in Persimmon. But if I didn’t, I’d be happy to have the stock in my portfolio.
The post Is the Persimmon share price heading back to £30? appeared first on The Motley Fool UK.
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James Beard has positions in Persimmon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.