Persimmon (LSE:PSN) shares have actually pushed upwards over the past month. Not by much, but just enough to make investors think the stock has probably bottomed out.
I haven’t given too much attention to housebuilder stocks in recent months, but with the monetary tightening cycle coming to an end, it may be time to reconsider.
So let’s take a closer look at Persimmon. Would it have been a good investment in recent years? And is it a good investment now?
Unhappy investors
If I’d invested £1,000 in Persimmon shares two years ago, today I’d have £405, plus dividends. Dividends would have been fairly sizeable during that period — around £140. However, that doesn’t go very far in making up for the share price losses.
But to make things worse, Persimmon actually cut its index-leading dividend in the autumn. The firm announced that “ordinary dividends will be set at a level that is well covered by post-tax profits”. This meant that the huge 18% yield would be cut. For many, it was unsurprising but not positive news.
What made this worse for me was the fact that I believed the dividend was affordable, based on Persimmon’s inaccurate estimate for its fire safety pledge.
In early 2022, the housebuilder said that the cost of recladding homes deemed unsafe after the Grenfell disaster would cost £75m. Fast-forward to late summer, Persimmon raised its estimate to £350m. The figure is around 40% of pre-tax profits in 2021/2022.
Currently, the dividend yield is around 4.8%.
What about now?
Well, Persimmon is trading near its lowest point for the last 10 years — it’s peers are roughly the same. As such, I do think it’s time to reconsider the sector. And there are several more reasons for this.
Analysts expect interest rates to moderate in the coming years, starting in H2. Higher interest rates have caused potential housebuyers to postpone their purchases and we’re likely to see demand increase when rates moderate.
Inflation is also moderating, and this is important from a cost perspective. Six months ago, investors saw interest rates rising, house prices stalling, and inflation running towards 10% — so they fled the sector. The forecast is much more positive from now on.
Because of these factors, HSBC recently upgraded its stance on a host of housebuilders, arguing that a downturn in the housing market are more than priced in to the shares.
“We now have greater visibility about the shape of the current housing market downturn for the housebuilders’ profits and cash flows and their recovery from it, which we believe to be more than priced-in to share prices“, HSBC said.
So would I buy Persimmon stock? Actually, no. I already own its shares and I’m not adding to my position.
I’m focusing on housebuilders with partnerships businesses, in addition to standard commercial operations, such as Vistry. Partnerships essentially refers to affordable housing and there’s more resilience here.
Despite improving conditions, I like the safety the partnerships business offers.
