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Persimmon - dividend suspended due to COVID-19 disruption

Emilie Stevens, Equity Analyst | 25 March 2020 | A A A
Persimmon - dividend suspended due to COVID-19 disruption

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Persimmon plc Ordinary 10p

Sell: 2,331.00 | Buy: 2,339.00 | Change 7.00 (0.30%)
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In line with government requirements, Persimmon is closing all sales offices and reducing all construction work to the minimum required for health and safety.

Management has decided it would not be "prudent" to pay dividends during the crisis, although this policy will be reviewed as the situations clarifies.

The shares fell 5% in early trading.

View the latest Persimmon share price and how to deal

Our view

Prior to the coronavirus pandemic, Persimmon's focus had been on addressing build quality and customer care problems. Now, as the country enters lock down, management will be devoting its energy to sheltering the business behind its balance sheet.

We doubt many people will be rushing to move house this summer. Which means housebuilders could face the dual threat of falling volumes and falling prices, which has the potential to demolish profits and cash flow.

Persimmon has around £610m in cash, £300m in available credit and has committed to pay £195m for land this year - giving it liquidity of about £715m in total. It's impossible to say how long the group can live off these reserves because we don't yet know how far management can reduce costs, or what the eventual hit to profits will be.

Management will be doing everything they can to reduce cash expenses to shore up the balance sheet. To that end, the dividend has been suspended. If the disruption is short lived investors may still see the dividend, just later than expected. But if it's sustained the company may need the money to keep operating instead.

"How long before conditions return to normal?" is the key question for investors. This doesn't just mean until the immediate pandemic is over - we could also see a sustained economic slowdown or recession. If the disruption is over quickly and the economy rapidly bounces back, then so much the better. If not, even the strongest balance sheets may begin to buckle under the pressure.

However, there are a few reasons to be cheerful. The long-term fundamentals of the UK housing market are still attractive. The nation faces a housing shortage, all major political parties are committed to further housebuilding, and mortgages are relatively affordable.

Prior to today's update, Persimmon shares changed hands for 1.7 times book value, slightly below the long-term average of 1.8 times. However, there's a risk book value could be written down in the near future. As most of Persimmon's assets are tied to house prices, if prices head south assert values will have to be written down.

If Persimmon can come through the current crisis avoiding more permanent damage, then we think the long-term outlook is positive. But there are potentially fatal threats in the immediate future, and investors should go into the next few months aware of the risks and with their eyes open.

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Trading details

Persimmon reported that 2020 had begun in a "robust" manner. However, the group is now expecting significant disruption, the duration of which is unknown.

Persimmon began the year with £844m in cash and £435m owed to land creditors, of which £268m is payable during 2020. As of 20 March, Persimmon had around £610m of cash and had deferred land commitments of £195m until year end. The group also has £300m of available credit.

While the board has stress tested the regular dividend, they describe the current circumstances as exceptional. The interim dividend of 125p per share due 2 April has been cancelled, and the final dividend of 110p per share due 6 July has been postponed.

Given the high degree of uncertainty, management is not providing guidance for this financial year. In accordance with government instructions, Persimmon is asking investors not to attend its AGM in person, instead an online webcast will be provided. The AGM is due to take place on 29 April, and further details will be provided on Persimmon's website.

Find out more about Persimmon shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.