Persimmon shares plunge as builder signals cut to dividend payments

AJ Bell press comment – 8 November 2022

• Consensus forecasts had implied 18% dividend yield on Persimmon stock before today’s revision to pay-out policy
• Double-digit forecast dividend yields at Vistry, Taylor Wimpey and Barratt to also come under scrutiny
• Rising costs, slowing economy and extra cladding remediation costs hit home
• Good news is housebuilders are carrying net cash and share prices have already fallen hard

“The record of FTSE 100 firms that on paper were due to offer a double-digit percentage dividend yield is particularly bad when it actually comes to handing over the cash and Persimmon now looks set to join an inglorious list that also includes Vodafone, Shell, Centrica and – when they were part of the FTSE 100 – Marks & Spencer, Evraz and IDS (or Royal Mail as it was then),” says AJ Bell investment director Russ Mould. “The housebuilder is refining its dividend policy and this looks set to end a run of 235p-per-share annual dividend payments, worth some £750 million a year, and equivalent to a dividend yield of nearly 19% at Monday night’s closing price.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Uses consensus per share dividend figure of 235p that prevailed for Persimmon before Tuesday’s announcement.

“While the share price plunge suggests that some investors are far from happy, the move to cut the dividend looks sensible. The housing market seems to be slowing down as cancellations increase and net reservations per sales outlet fall, input cost inflation is proving sticky, and Persimmon is adding £275 million to the provisions needed to cover the cost of cladding remediation on tall buildings, to take the total to £350 million.

Source: Company accounts. *Based on mid-point of any guidance range provided by management. Berkeley has to yet to disclose any figures.

“Preservation of cash will be key, not just because of the threat of a recession.

“This is partly because a strong balance sheet protects the company from the ravages of any downturn in the economy, profits and cash flow.

“And it is partly because the real secret sauce to being a successful housebuilder is buying land at the right time of the cycle, because snapping up lower-cost plots during a downcycle gives the builder the chance to ride house price inflation in the next upcycle.

“Having cash on hand reduces the risk of buying plots when times look tough and prioritising the long-term land bank over short-term cash returns to investors should bring its reward over time, at least if history is any guide.

“The good news is that Persimmon expects to end the calendar year with £700 million in net cash, even after the payment of a 235p-per-share dividend relating to the last financial year that ended in March 2022.

Source: Company accounts

“Retaining at least a portion of the £750 million dividend pay-out will give Persimmon an extra line of defence and additional financial flexibility and it seems likely that investors will now start bracing themselves for lower payments from other housebuilders, especially as Vistry, Taylor Wimpey and Barratt Developments are all offering a double-digit dividend yield, according to current consensus forecasts.

“The builders between them paid out £2.2 billion in dividends for their last financial year and Redrow, Berkeley, Barratt and Taylor Wimpey have also run share buyback schemes in 2022, although Taylor Wimpey completed its programme in June.

“Cynics may also point out that no sooner has Help to Buy come to an end then builders are reassessing their cash allocation policies, since the big, quoted builders have dished out £11 billion to shareholders in dividends and a further £1 billion in share buybacks since then Chancellor of the Exchequer George Osborne launched the scheme back in April 2013. Taxpayers could be forgiven for wondering whether cash has simply flowed straight from the public purse through the builders to their shareholders.

Source: Company accounts for Barratt, Bellway, Berkeley Group, Countryside Partnerships, Crest Nicholson, Persimmon, Redrow, Taylor Wimpey and Vistry

“From the narrow perspective of share prices, many investors were already sceptical about analysts’ earnings and profit forecasts in light of prior cautionary statements from Bellway and Barratt about sagging reservation rates.

“The combination of an aggregate dividend yield of 10% and a forward price/earnings ratio of barely six suggests the market was already anticipating cuts to dividend and earnings forecasts, at least to some degree, as do the lowly multiples of book value upon which the builders are trading.

“An old rule of thumb is that builders look cheap when they trade below one times historic book value and expensive when that multiple nears or exceeds two times.

“Only Berkeley, Countryside and Persimmon now trade above one times historic book and Vistry trades down near half-times net asset value, although that is a little deceptive as around a fifth of net assets are goodwill and intangibles after two big corporate deals, so tangible net asset value is a little lower than it first looks.

“The lowly multiples of book might even tempt in some brave, patient, contrarian investors, especially as the bad news on dividends is now coming out and the builders are in much better financial shape as they confront this potential downturn than they were in 2007 when the last big smash hit home. Then they carried £4 billion in net debt between them, whereas at the last count their combined net cash pile was £4.7 billion. They should be able to weather the storm.”