The Persimmon (LSE:PSN) share price fell sharply last week following a trading update by the management team. But as a result of this sudden drop, the dividend yield of this FTSE 100 company is inching closer towards 8%. So my questions are, was the trading update as bad as it seemed? And if not, should I be adding this business to my portfolio?
What’s going on with the Persimmon share price?
Despite what Persimmon’s share price would indicate, the trading update was actually quite encouraging. The number of home completions rose to 7,406 versus 4,900 in 2020 and 7,584 in 2019 over the same six-month period. While that’s not quite at pre-pandemic levels, it’s close. And due to rising house prices, the group’s total average selling price now stands at £236,200 versus £216,942 two years ago. Consequently, total revenue for the period was up, coming in at £1.84bn versus £1.75bn in 2019.
To me, that’s a sign of the company returning to its pre-pandemic levels of operations. And it seems the management team would agree as it expects this growth to continue throughout the remainder of 2021. Considering the stock is currently trading at a P/E ratio of around 15, I’m starting to wonder whether this stock is too cheap?
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But a question remains. If the trading update was positive, why did the Persimmon share price tumble after it was released?
Rising uncertainty within the housing market
While the performance is impressive, it’s important to remember that Persimmon benefited greatly from favourable market conditions, despite the pandemic. As a means to boost property sales while Covid-19 ravaged the UK economy, the government issued a waiver on stamp duty for homes under the value of £500,000.
Naturally, the suspension of this tax significantly improved affordability for first-home buyers. However, now that the pandemic is slowly coming to an end, so is this favourable environment. As of the start of July, the stamp duty threshold was lowered to £250,000. And by October, it will return to £125,000.
Combining this with the fact that the Help-To-Buy scheme is also ending in less than two years means a bit of uncertainty within the housing market. Needless to say, for a builder, that’s not good news. So, I can understand why some investors are taking their profits. And as a consequence, the Persimmon share price is suffering for it.
The bottom line
It seems we may be approaching the end of the current peak within the real estate market cycle. But over the long term, the FTSE 100 company has been an impressive performer. Looking back at the last 20 years, the stock is up more than 1,100%. And that’s despite going through one of the worst property crises in the history of capitalism.
Therefore, even though the Persimmon share price could continue to tumble over the short term, it’s still a business I would consider adding to my income portfolio for the long term.
