The Persimmon share price looks cheap to me, with its 8% dividend yield

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I bought Persimmon (LSE: PSN) shares for the dividend. And seeing the housebuilder’s first-half results, released Thursday, I’m glad I did. Even though the comparative period in 2020 was blighted by Covid, the figures looked strong to me. And I was surprised that the Persimmon share price didn’t really respond.

With surplus cash to hand back, there’s a dividend yield of 8.2% on the share price at the time of writing. It’s well covered by earnings too, and the market’s seeming lack of interest does puzzle me.

Presumably investors are fearing a housing market slowdown. But I think that’s a poor reason to avoid housebuilder shares, on two counts. For one, Persimmon’s forward sales are around 9% ahead compared with pre-pandemic 2019. The company adds that its “weekly private sales rate per site for the first 33 weeks of the year is over 20% stronger than 2019.” So if there is a slowdown coming, it doesn’t look like it’s happening this year. At least not for Persimmon.

Persimmon share price support

I also expect a slowdown to do little harm to the long-term prospects for the industry. Our chronic housing shortage will surely keep property values buoyant in the long term. And housebuilders don’t need rising prices to make their money anyway. Last time there was a dip, they used falling land prices to build up their land banks — and today’s shareholders are reaping the rewards.

The sector generates strong cashflow. At the end of the half, Persimmon was sitting on £1.32bn in cash. Even a year previously, when so many companies were desperate for infusions of the stuff, Persimmon boasted cash of £0.83bn. Seeing a healthy balance sheet, coupled with apparently strong demand, I feel confident enough in my future stream of dividends.

But let me rein in my enthusiasm a bit and think about the market’s lukewarm attitude to the sector. I think most investors look primarily at share prices and share price valuations. On that score, the current Persimmon share price indicates a price-to-earnings ratio of around 11 based on 2019 earnings. It looks to me as if 2021 is likely to come in similarly, so I think that’s a reasonable figure to use.

Fair valuation?

It’s below the long-term average for the FTSE 100, though not by a huge amount. And it’s not obviously cheap for a stock in a cyclical sector. And the housebuilding sector has undoubtedly gone through its cyclical phases. I have made light of housing market fears. But even a stagnation, even for a relatively short period, could be enough to push investors away from the market. And if the past is anything to go by, they could take some time to come back.

So yes, there is a reasonable fear that the stock might at least go nowhere for a few years. And it might even go into a decline. But for me, the Persimmon share price just does not matter as long as I’m getting a healthy dividend yield on the price I paid. Well, actually, a future lower price could help me lock in even better income for less outlay.

So I’m holding, and I intend to buy more if we hit a down spell.

The post The Persimmon share price looks cheap to me, with its 8% dividend yield appeared first on The Motley Fool UK.

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Alan Oscroft owns shares of Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.