Will this FTSE 100 stock yield 18% in 2023?

persimmon (LSE: PSN) is the largest housebuilder in FTSE 100. Based on the current share price, and last year’s dividend, the stock has returned a whopping 18%! If managed, this means shareholders will receive a dividend of £180 in 2023, for every £1,000 invested.

Too good to be true?

Last year was difficult for shareholders in the company – I should know, I am one.

During 2022, Persimmon’s share price fell by 56%. Only one other stock in the FTSE 100 fared worse.

An investment of £10,000 made at the start of 2022 will be worth £4,400 at the end of the year. However, shareholders like me can get the satisfaction of a dividend of 235p per share paid in two instalments. When taken into account, this reduces paper losses by £848.

The healthy gains in Persimmon stock were attributed to a sharp drop in the company’s stock price. If prices remain unchanged from the beginning of the year, the stock will now yield 8.5%. This is still impressive, but not the top of the FTSE 100.

Safe as home?

So why are prices falling? The UK housing market faces the triple threat of rising interest rates, falling household incomes and falling mortgage availability.

This prompted the Persimmon board to issue an unscheduled trading update in November. An increase in cancellation rates and a decrease in weekly sales were announced. The deterioration in the forward sales position, along with the increase in corporate tax and residential property tax, forced the board to revise the capital allocation policy (the amount paid to shareholders).

The basic principle of the new policy is to ensure that the dividend “also covered” by after-tax profits, leaving enough funds available to acquire land.

Over the past five years, the company’s full-year profits have averaged £790m. Based on the number of shares currently in circulation, the 235p dividend would be worth £750m. This shows how much dividends have been paid in recent years. The company has generated almost all of its profits for its shareholders.

Predictions for 2023

With so many headwinds affecting the housing industry, it looks like Persimmon will cut its dividend in 2023.

Let’s assume that the company’s profit this year will be 20% lower than the five-year average, and the board will return 75% of that amount to shareholders. This means there is £475m of cash available to pay dividends of around 150p per share.

Based on the current share price, this would yield 11.5% – still the highest in the FTSE 100.

Even with a 50% less profit, the yield will exceed 9%.

A reason to be cheerful

I am optimistic about the long-term outlook for the housing market. Rents are becoming increasingly unaffordable and fewer people are able to get on the housing ladder. The solution to both problems is to build more houses.

That’s why I’m comfortable with investing in Persimmon. I don’t think the current share price accurately reflects the cash generation potential of the business. A lower forecast dividend for 2023, still yielding good results.