Could FTSE 100 9%-yielder Persimmon help you retire early?

Roland Head looks at today’s numbers from FTSE 100 (INDEXFTSE:UKX) housebuilder Persimmon plc (LON:PSN) and gives his verdict on the stock.

| 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.

The share price of housebuilder Persimmon (LSE: PSN) was flat today, despite news of a big increase in pre-tax profit and higher profit margins.

Today, I’m going to look at the numbers behind the stock’s 9% dividend yield and ask whether the market is being too cautious. I’ll also give my verdict on another property stock with a near-9% yield.

Demand remains strong

Persimmon’s sales rose by 5% to £1.84bn during the first half of the year. Pre-tax profit was also 13% higher, at £516.3m.

Should you invest £1,000 in Boohoo Group 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 Boohoo Group made the list?

See the 6 stocks

This growth was driven by a 4% increase in new home sales, which rose to 8,072. Average selling prices also edged higher, rising 1% to £215,813.

Demand for new homes still seems strong. The firm’s order book rose by 6% to £2.12bn during the half year, while management bought a further 7,860 plots of land for future development.

Operating margin for the period was 27.9%, ahead of last year’s 26.5%. This impressive result helped to bolster the group’s net cash balance, which was £1,154.6m at the end of June.

Too dependent on Help to Buy?

Today’s announcement didn’t reveal how many sales were made to buyers with Help to Buy mortgages during the first half of 2018. But in 2017, 47% of the group’s sales benefited from these government loans.

The current Help to Buy programme ends in 2021. There’s no guarantee of whether the scheme will be continued, and this is reflected in today’s dividend guidance. Persimmon plans to return 235p per share to shareholders in 2019 and 2020, followed by a minimum of 110p per share in 2021.

Should you be buying?

Trading remains robust and the forecast dividend yield of 9.6% makes the stock look very cheap. But I think the market is starting to price in a housing downturn.

This year’s dividend income has been cancelled out by the 10% share price slump seen so far in 2018. And it’s worth remembering that Persimmon stock now trades at a lofty 2.7 times its book value.

I don’t see much value here, although I would rate the stock as a hold for income.

Bargain buy or value trap?

Property stocks are traditionally seen as value buys when they trade at a discount to book value. Shopping centre owner Intu Properties (LSE: INTU) fits this description. Its shares currently trade at a 48% discount to the firm’s industry-standard EPRA net asset value of 309p.

Alongside this discount, Intu stock boasts a forecast dividend yield of 8.7%. So why aren’t I buying?

The first problem is that Intu’s net asset value fell by 11% during the first half of the year. I fear this could be the first of several downgrades needed to reflect the falling rental value of many retail units.

The recent failure of House of Fraser has highlighted the problems facing big retailers. New owner Mike Ashley is certain to be negotiating lower rents on the stores he decides to keep open.

My second concern is that the group’s loan-to-value ratio of 48.7% is quite high. Falling property values and flat rental income mean that this debt ratio could easily rise further. I think a dividend cut is likely at some point.

On balance, I expect more bad news before things start to improve. So, for now, I’m avoiding this potential value trap.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »

Investing Articles

When will Lloyds shares hit £1?

Lloyds shares have surged over the past 12 months, but where will they go next? Dr James Fox thinks there’s…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »