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persimmon (LSE: PSN) stock has long been a high-yielding leader in the FTSE 100. Economic fundamentals in the UK now appear to support share price gains. To me, these two factors together make the stock look cheap at current levels.
The UK economy is looking better than previously thought
The housing market in the UK is supported by economic conditions, and the outlook for both is improving. The UK economy will not grow between October and December 2022, according to the Office for National Statistics. In March, the Office for Budget Responsibility (OBR) said the economy would contract by 0.2% in 2023. However, it added that it did not forecast two consecutive months of economic contraction. This means that the UK will not experience a technical recession. In short, the British economy is likely to improve.
Even these figures, though, seem overly pessimistic to me, and I am not alone in this view. The OBR’s Professor David Miles said the ‘central estimates’ in the Autumn Statement were “virtually certain” to be incorrect. The central estimate is the economic outcome that is considered the most likely. This is because these forecasts do not anticipate changes in economic conditions. The economy was reeling from spiraling energy prices, inflation, and interest rates at the time. However, that view is expected to decline again this year.
Persimmon does well in difficult times
The main positive for me is that even in a very difficult operating environment in 2022 Persimmon is performing strongly. The 2022 results show an increase in total group profits to £3.82bn, from £3.61bn in 2021. On an underlying basis, pre-tax profits rose to £1.01bn in 2022 from £973m in the previous year.
In addition, the positive is that new home completions will be 14,868 in 2022 from 14,551 in 2021. The construction rate is also up 8% year-on-year, with H2 2022 showing an increase of 15%. The company also showed strong cash generation of just over £1bn in 2022. Cash held at the end of 2022 was £861.6m, reflecting strong investment in land, work in progress and capital returns.
Persimmon promises another dividend bonanza
Because of this cash pile, Persimmon pays a dividend of 125p per share on 1 April 2022 and 110p per share on 8 July 2022. For 2022, the company is proposing a final dividend of 60p per share to be paid on 5 May 2023. The dividend yield on shares for 2022 is 14.14 %. For 2023, Persimmon aims to maintain the 2022 dividend, with the aim of increasing it.
One potential risk as a shareholder is that UK inflation and interest rates will not fall again in 2023. This will cause caution on the part of new home buyers, and may drag down share prices.
However, the consistently high payout of Persimmon stock is reason enough for me to continue holding it. Any rise in the share price is a bonus.
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