If I had invested £10,000 in Persimmon shares 5 years ago, how much passive income would I have now!

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If I had invested £10,000 persimmon (LSE:PSN) shares in June 2018, my shareholding will now be £4,400.

To make matters worse, the housebuilder — which has a reputation for returning nearly all of its profits to shareholders — recently cut its dividend.

In respect of the 2021 financial year, shareholders received 235p for each share held. For 2023, the directors are hoping that “least“maintain last year’s 60p per share”with a view to increasing it over time,

My hypothetical investment five years ago would have earned me 388 shares. Since 2018, I have had a very nice passive income of £3,822.

But if I had reinvested the dividends at the end of each year, I would now have an additional 211 shares. And my five year income would have been £4,510.

Plus, the extra stock will reduce my paper loss to £3,369.

To hope

But all this is history. Is the stock worth buying now?

Despite the dividend cut, the drop in share price means shares are yielding roughly 5.5%. it’s up FTSE 100 average.

But with stubborn inflation affecting living standards and rising interest rates driving up mortgage costs, the company is expecting to build far fewer homes this year. In its most recent trading update, it said that closing will be “attop end8,000-9,000 ka.

The last time Persimmon built so few homes was in 2009, when it sold 8,976 properties. It did not pay a dividend that year and recorded a pre-tax profit of only £78 million.

However, I am hopeful that things will get better this year.

calculate

In 2022, the company projects a gross profit of £76,843 per household. Assuming 9,000 completions and overhead of £150 million, pre-tax earnings for 2023 should be around £545 million. Even with a 10% reduction in margin – to reflect a fall in average selling price and/or an increase in costs due to inflation – the company should earn over £300m (94p per share).

A dividend of 60p requires £192 million in cash. Even at the lower end of profit expectations, it pales in comparison to earnings. In 2021, the company returned 95% of its profits to shareholders.

So I expect the dividend could be closer to 75p this year. If true, this implies a yield of 6.8%.

One reason the company has been able to pay out such a high portion of its profits is that it is debt free. This is quite a feat for a business that is exposed to a cyclical housing market and must buy land to ensure it can meet future demand.

But my investment case assumes that there will be no further shocks to the UK housing market. This is not guaranteed as the Bank of England is expected to raise interest rates further.

What should I do?

I already own shares in Persimmon. But I don’t have the extra cash to buy anything else.

I have no intention of selling my shares even though I think it has been a tough few years. The country has a chronic housing shortage that needs attention. In the long term, once the company starts building 14,000-16,000 properties per year, I believe the shares will return to their 2021 levels.

Until then, I’ll be content with earning above average passive income.

The post If I had invested £10,000 in Persimmon shares 5 years ago, how much passive income would I have now! First appeared in The Motley Fool UK.

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James Beard holds positions in Persimmon plc. The Motley Fool UK has no position in any of the stocks mentioned. The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.

Motley Fool UK 2023

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