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Persimmon - A strong year brings higher dividends

George Salmon | 27 February 2017 | A A A
Persimmon - A strong year brings higher dividends

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Persimmon plc Ordinary 10p

Sell: 2,732.00 | Buy: 2,735.00 | Change -117.00 (-4.11%)
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Underlying profit before tax increased 23%, driven by both increases in revenue and margins. With the balance sheet strengthening over the year, and a good start to trading in 2017, the group has expanded its capital returns plan. The shares rose just shy of 2% on the news.

Our View

The Brexit vote added a dollop of uncertainty to the UK's housing market, but even in the face of gloomy data, the housebuilders have continued to report strong sales and high levels of interest. The fact that Persimmon is expanding its capital returns plan is further evidence of its confidence.

There are many reasons why the market is proving resilient so far. Brits still want to own their own homes, and the UK faces a major housing shortage. After the vote, the Bank of England moved quickly and decisively to cut interest rates, and it looks as though, barring a full-blown sterling crisis, rates will stay low for the foreseeable future. If this proves to be the case, mortgage affordability will remain high.

Persimmon has also cited the benefits of the government's Help to Buy incentives for first time buyers. Many of the schemes are designed to encourage the purchase of new-builds, which are accounting for an increasing number of transactions, relative to existing homes. That is providing the industry with a cushion the rest of the housing market lacks.

However, it would be foolish to think that the sector is not vulnerable to a fall at some point. Housing crashes can turn up at short notice and have in the past had pretty nasty consequences for shares in the sector.

Fortunately, Persimmon has a stronger balance sheet than at the time of the last crisis. Its large land bank enables it to adopt a cautious approach to acquiring new plots if need be, which should mean cash generation remains strong. It's also worth adding that the group has limited exposure to the London and South East markets, which some analysts have predicted could be at most risk.

Persimmon plans to return 110p per share per year out to 2021. This means the shares offer a prospective yield of 5.5%.

Full year results:

Full year revenue rose 8% to £3.1bn, with increases in average selling price (up 3.8% to £206,765) and legal completions (up 4.1% to 15,171). With operating margins also increasing, from 21.9% to 24.8%, underlying profit before tax rose 23% to £783m.

Forward sales are 9% ahead of last year at £1.89bn, and the group says customer activity in the early weeks of the 2017 spring season has been encouraging.

Persimmon has built on its previously announced plans to return £9 per share to shareholders from June 2013 to June 2021. In addition to the 110p per share due to be paid in July, the group will also pay an extra 25p per share to shareholders on 31 March 2017. This brings the total to £9.25 per share.

Over the year the group acquired 18,709 plots, including 11,268 converted from the strategic land bank (land without planning permission). The group's land bank with planning permission is now 52,800 plots (2015: 54,300), with a further 18,000 plots awaiting planning approval and the acquisition of 26,400 plots awaiting legal completion.

Free cash flow (before capital returns and land creditor movement) was £711m. This has helped the group to a net cash position of £913m. Monies owed to land creditors, not included in the net cash position, is £555m.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.