On an otherwise lacklustre day for the UK stock market (25 April), the Persimmon (LSE: PSN) share price has been holding its own, thanks to an encouraging update on trading.
In fact, I’m inclined to increase my position based on today’s news.
Steady trading
Following a trend set by housebuilding rival and FTSE 100 member Taylor Wimpey earlier in the week, the business said its performance in the first quarter had been in line with expectations.
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A total of 1,027 homes were delivered in Q1. This was slightly down compared to the same period in 2023. However, the net private sales rate per outlet (a key metric in the sector) rose 6% to 0.66, excluding bulk sales. To me, that’s a positive sign.
Although interest isn’t the same as sales, I’m also buoyed by news the company’s drawing “healthy traffic” to its sites. This sort of momentum should continue as speculation builds that the Bank of England is finally ready to begin cutting interest rates.
Prices are rising
For now, the outlook’s cautiously optimistic rather than overly bullish.
While it’s anticipated that build cost inflation and lower average selling prices will impact performance in the first half of the year, Persimmon does expect this situation to “reverse” in the second half. As a result, it forecasts between 10,000 and 10,500 completions in FY24.
Interestingly, private average selling prices climbed 6% to £283,000 since the start of the year. Is this a sign that the Great House Market Recovery is already underway and Persimmon shares are set to soar?
Not necessarily. A longer-than-expected wait for rates to be cut would likely see some investors shuffle to the exits.
Deceptively cheap
Of course, we shouldn’t ignore the valuation. A price-to-earnings (P/E) ratio of 15 is pretty average compared to other housebuilders and UK shares in general.
Then again, investors need to bear in mind that earnings forecasts can sometimes be (very) wide of the mark. I suspect analysts will be forced to frantically revisit their calculations when the first rate cut comes, mortgage affordability improves and interest from previously-hesitant buyers grows.
What looks very ordinary now may prove to be a bargain in a year or two.
On safer ground
As ever, trying to predict the near-term movement of any share price is nigh-on impossible. It’s the long term that matters for a Fool like me. So I’ll just stick to enjoying the passive income stream for now.
Having been reduced massively in 2022, Persimmon’s dividends now look far more affordable. Maintaining the 60p per share payout in 2024 would give a yield of 4.6% at the current share price.
Yes, there are a handful of UK stocks offering (a lot) more. However, the risk of not receiving this cash is arguably far greater in a lot of cases. If it looks too good to be true, it usually is.
Persimmon’s payout can never be guaranteed. But in the absence of a complete meltdown in trading, it looks like being easily covered by expected profit.
My verdict
Taking today’s update, its substantial landbank, resilient finances and the ongoing under-supply of quality housing into account, I’m happy to maintain my position and possibly buy more when cash becomes available.
