Should I Invest In Persimmon Plc?

Can Persimmon plc’s (LON: PSN) total return beat the wider market?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

Should you invest £1,000 in Aviva right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aviva made the list?

See the 6 stocks

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Persimmon (LSE: PSN), the UK-focused house builder.

With the shares at 1122p, Persimmon’s market cap. is £3,403 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 1,755 1,421 1,570 1,535 1,721
Net cash from operations (£m) 244 353 226 122 182
Adjusted earnings per share 35.3p 2.1p 24.8p 36.8p 57.6p
Dividend per share 5p 0 7.5p 10p Capital
return

Cyclical recovery continues apace at Persimmon. The recent interim report revealed revenue up 12%, earnings per share up 35% and cash inflow from operations up 38%, all compared to a year ago.

Encouragingly, forward sales are up 21% too, and the director’s reckon that the firm is seeing a gradual improvement in the UK mortgage market, citing recent Bank of England data that shows a, roughly, 20% increase in mortgage approvals in May and June this year compared to the same period last year.

Those forward sales are important to support Persimmon’s Capital Return Plan. Investors recently saw an inaugural return of 75p a share under the plan, and had the choice of either a special dividend or a capital refund. The director’s now propose to pay investors 10p per share in June 2014 as part acceleration of 2015’s 95p payment.

Ditching the dividend policy in favour of the Capital Return Plan sent the market a clear signal in terms of the company’s forward earnings expectations and the share price has more than doubled since I last wrote about Persimmon during May 2012. However, although the plan indicates a total shareholder return of £6.20 per share, investors will have to wait until 2021 to get the full amount, and some years do not have a payment scheduled. It’s also possible that each repayment could attract a corporate action charge within your share account, so it’s worth checking with your provider.

Despite such inconveniences compared to a straightforward normal annual dividend, I’m still optimistic about the company’s potential to outperform on total investor returns from here.

Persimmon’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: earnings covered the recent 75p/share capital return around 0.8 times. 1/5

2. Borrowings: the recent interim balance sheet shows net cash.  5/5                    

3. Growth:revenue, earnings and cash flow have all been growing recently.  5/5

4. Price to earnings: a forward 12 or so compares well to earnings growth expectations. 5/5

5. Outlook: robust recent trading and a positive outlook. 5/5

Overall, I score Persimmon 21 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.

Foolish Summary

Zero borrowings, robust earnings growth, a positive outlook and a modest-looking valuation all combine to make me bullish on Persimmon.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Aviva right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aviva made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin does not own shares in Persimmon.

More on Investing Articles

Mature friends at a dinner party
Investing Articles

Here’s a 5-stock ISA portfolio that could generate £1,000 a month in passive income

Our writer shows how a £20,000 Stocks and Shares ISA could go on to generate the equivalent of over £1,000…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With US stocks shaking, I’m using the Warren Buffett method to build wealth

With over $300bn of cash, Warren Buffett may soon start looking for long-term, bargain-buying opportunities within the US stock market.

Read more »

Portrait of worried woman standing beside window
Investing Articles

2 reasons why I’m avoiding dirt-cheap Lloyds shares!

Lloyds shares look like a brilliant bargain on paper. But I believe they reflect the many potential horrors facing the…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£5,000 invested in a SIPP 5 years ago could now be worth…

Here’s how much someone could have made in a SIPP had they invested in the last stock market crash. Is…

Read more »

Investing Articles

Looking for dividend stocks? Here’s a discounted investment trust to consider!

This real estate investment trust (REIT) offers a near-9% yield. Here's why it's one of my favourite dividend stocks right…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 small-caps on the London Stock Exchange to consider for passive income 

Aiming to generate passive income from an ISA portfolio? Our writer reckons these two smaller firms from the London Stock…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Can Aston Martin shares make it through to end of the year?

Aston Martin shares have slumped as the iconic brand has faced challenge after challenge following the pandemic. Will it survive…

Read more »

Investing Articles

£5,000 in savings? Here’s how an investor could aim for £12k annual passive income

With just a modest lump sum of savings and small monthly contributions, an investor could work toward a decent passive…

Read more »