The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that have the potential to beat the FTSE 100 over the long term, and should support a lower-risk income-generating retirement fund (you can see the companies I’ve covered so far on this page).
Today, I’m going to take a look at house builder Persimmon (LSE: PSN), which was promoted back into the FTSE 100 in the index’s most recent reshuffle.
Persimmon vs FTSE 100
Let’s start with a look at how Persimmon has performed against the FTSE 100 over the last 10 years:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 10 yr trailing avg |
|---|---|---|---|---|---|---|
| Persimmon | -66.6% | 104.4% | -10.6% | 14.8% | 71.5% | 11.4% |
| FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 10.0% | 8.3% |
Source: Morningstar
(Total return includes both changes to the share price and reinvested dividends.)
Persimmon has outperformed the FTSE 100 over the last ten years, delivering an annualised average total return of 11.8% per year, compared to 8.6% per year for the FTSE.
These figures highlight the benefits of buying good companies at low valuations, and then holding for the long term — even with the 2008/9 crash, Persimmon shareholders have still been well rewarded over the last ten years.
What’s the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let’s see how Persimmon shapes up:
| Item | Value |
|---|---|
| Year founded | 1972 |
| Market cap | £3.7bn |
| Net debt (cash) | (£201.5m) |
| Dividend Yield | No regular dividend but cash returns are planned. |
| 5 year average financials | |
| Operating margin | 3.6% |
| Interest cover | 9.2x |
| EPS growth | -16.4% |
| Dividend growth | n/a |
| Dividend cover | n/a |
Persimmon does not currently pay a regular dividend, but it has committed to return £1.9bn of cash to shareholders between 2012 and 2021.
At today’s share price of around 1,215p, these cash returns will provide an annualised yield that will rise from about 3.1% in 2013/14, to 9.5% in 2021.
Let’s see how Persimmon scores overall, taking into account its unconventional dividend policy:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | At 41, it’s survived a few downturns. | 3/5 |
| Performance vs. FTSE | Long-term outperformance. | 5/5 |
| Financial strength | £200m net cash and no debt. | 5/5 |
| EPS growth | Earnings per share are just 40% of 2007 levels. | 2/5 |
| Dividend growth | Generous cash returns, but I’d prefer a regular dividend commitment. | 3/5 |
| Total: 18/25 | ||
Since 2008, UK government policy seems to have been aimed at preventing a true correction to house prices, which would have forced many of the UK’s mortgage lenders to take much bigger losses on their loan books.
Persimmon has been one of the biggest beneficiaries of this situation, and 22% of its reservations so far in 2013 have been through the government’s ‘Help to Buy’ scheme, highlighting the risk of falling profits if the scheme is wound down.
My verdict
Although Persimmon should provide investors with a decent income over the next eight years, its shares currently trade at nearly twice its book value and at 22 times 2012 earnings. I’m also concerned that its profits are too dependent on short-term government policies.
Overall, I think that Persimmon is a good company, but it’s too expensive at the moment.
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> Roland does not own shares in Persimmon.
