8 November 2022
If you are covering Persimmon’s latest trading update, please find below a comment from Oli Creasey, equity research analyst at Quilter Cheviot:
“Persimmon’s Q3 trading statement captures the mood of the UK housing market; the company is not panicked, but is preparing itself for worsening conditions. The guidance provided for 2022 is unchanged, with the first three quarters of the year providing enough sales momentum to hit forecasts made earlier in the year.
“However, the environment is clearly getting worse. The pace of house sales in Q3 and the first weeks of Q4 is slower than last year, and the volume of forward sales expected to complete next year is also lower. This may in part be a result of the end of the Help 2 Buy scheme, which helped fund around 20% of Persimmon’s sales in 2022 so far, but is also a reflection of general market conditions. The company has not offered any specific guidance for the coming year, but acknowledges that both sales volumes and selling prices are expected to be lower than this year, which will inevitably reduce margins as well.
“However, perhaps the most important new information for investors is an impending change to the dividend policy. The change had to happen eventually– the company has paid a total dividend of 235p per share for four of the past five years (2020 being the exception), but while that has generally been covered by earnings, free cash flow (accounting for reinvestment into land etc) has been someway lower, meaning the company has sometimes drawn on its substantial cash reserves to cover the payout. As with the forecasts, no specific figures have been provided yet (likely to be announced in March 2023), but given analysts’ consensus for 2023 EPS is 175p, we think a meaningful cut is likely given management will want the new baseline to be sustained by company profits.
“The dividend change shouldn’t be seen as a huge problem. It has been clear for some time that Persimmon couldn’t afford these payments indefinitely, and so the question was always “when” rather than “if”. The earnings yield on 2023 estimates is 13%, and even if the dividend is reduced to something like 120p, which would give the company plenty of headroom, the dividend yield to investors will still be over 9%, still a healthy-looking payout.”
