In the first half of 2022, my wife and I built up a cash pile from cash dividends and share sales. After sitting on this ‘dry powder’ for a few months, we put it to work in the stock market, starting in late June. One stock we bought for its market-leading dividend yield was Persimmon (LSE: PSN). Alas, Persimmon shares have had a poor 2022, losing a big chunk of value. So should we cut our losses by selling now?
Persimmon shares plunge
Back in spring 2021, the Persimmon share price was riding high. On 9 April 2021, this FTSE 100 stock closed at 3,210p. As I write, this share hovers around 1,793p, down 2.5% today following the release this morning of the housebuilder’s latest half-year results. Here’s how the shares have performed over six timescales:
| Five days | -5.1% |
| One month | 1.6% |
| Six months | -25.1% |
| 2022 YTD | -37.2% |
| One year | -37.1% |
| Five years | -28.5% |
Though Persimmon shares have risen slightly over the past month, they’ve lost a quarter of their value over the past six months. Even worse, they’re down nearly two-fifths over one year and nearly three-tenths over five years. But the above returns exclude cash dividends — and Persimmon’s dividend yield is among the highest in the London market.
Persimmon’s results disappointed me
Looking at the company’s latest set of results, three things stuck out for me. First, the number of home completions fell by 10.2% year on year. Second, group revenues dipped by 8.2% to £1.69bn (from £1.84bn in H1/2021). Third, cash at hand dropped to £0.78bn from £1.32bn, down 40.9%. No wonder the Persimmon share price slipped today.
However, it’s not all bad news for this property developer. Average selling prices were higher, while the cash depletion and negative cash flow was due to the firm buying 8,829 new plots for development (a replacement rate of over 130%).
Also, the group has paid 235p per share in dividends to shareholders in 2022 for the 2021 financial year, the same as in the previous year. This makes it one of the most generous dividend payers in the FTSE 100.
Sell, hold or buy?
As a veteran value investor, I rely on share fundamentals to guide my investing decisions. My wife bought Persimmon shares in late July for their whopping dividend yield. And when I look at the company’s fundamentals today, they appear very undemanding to me. They trade on an earnings yield of 13.6% and offer a running dividend yield of 13% a year.
In other words, the group is paying out most of its earnings in dividends. Hence, dividend cover is only 1.05, which is a bit too slim for my liking. Also, and history has taught me that double-digit dividend yields rarely last. But even if Persimmon were to halve its cash payout, it would still be a market-beating 6.5% a year.
Finally, Persimmon shares might suffer due to rising inflation and rising interest rates making future home loans more expensive to service. Also, UK economic growth is slowing and a recession is a real possibility. Yet despite these worries, I will hang onto my Persimmon stock for their big dividends and for long-term price gains. I might even buy more shares if the price keeps falling!
