Persimmon (LSE: PSN) shares have long been a high-yield leader in the FTSE 100. Economic fundamentals in the UK now look supportive of share price gains. For me, these two factors together make the stock look cheap at current levels.
UK economy looks better than previously thought
The UK’s housing market is underpinned by the state of the economy, and the outlook for both has improved recently. The UK economy saw zero growth between October and December 2022, according to the Office for National Statistics. In March, the Office of Budget Responsibility (OBR) said it expects the economy to contract by 0.2% in 2023. However, it added that it does not foresee two successive three-month periods of economic decline. This means Britain will not go into a technical recession. In short, the UK’s economy is likely to improve.
Even these figures, though, look overly pessimistic to me, and I am not alone in this view. The OBR’s Professor David Miles said that its ‘central estimate’ in the Autumn Statement was “virtually certain” to be incorrect. The central estimate is the economic outcome it considers most likely. This is because this estimate does not anticipate changes to prevailing economic circumstances. The economy was reeling from spiralling energy prices, inflation, and interest rates at that time. However, these look set to trend down again this year.
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Persimmon performed exceptionally well in tough times
A key fundamental positive for me is that even in the extremely difficult operating environment of 2022 Persimmon performed strongly. Its 2022 results showed an increase in total group revenues to £3.82bn, from £3.61bn in 2021. On an underlying basis, pre-tax profit grew to £1.01bn in 2022 from £973m the previous year.
Additionally positive was that new home completions increased to 14,868 in 2022 from 14,551 in 2021. Build rates were also up 8% year on year, with H2 2022 showing a 15% increase. The company also showed strong cash generation of just over £1bn in 2022. Cash held at the end of 2022 was £861.6m, reflecting strong investment in land, work in progress and capital return.
Persimmon promises another dividend bonanza
Given this cash pile, Persimmon paid out dividends of 125p per share on 1 April 2022 and 110p per share on 8 July 2022. For 2022, the company proposes a final dividend of 60p per share to be paid on 5 May 2023. This gave a stunning dividend yield for 2022 of 14.14%. For 2023, Persimmon intends to at least maintain the 2022 dividend, with a view to increasing it.
One potential risk as a shareholder is that UK inflation and interest rates do not begin to trend down again in 2023. This would lead to ongoing caution from new home buyers, and likely drag the share price down somewhat.
However, the ongoing high pay-outs from Persimmon shares are reason enough for me to continue to hold them. Any rise in the price of the stock is a bonus.
