Is Persimmon the best bet among high yielders?
The Consumer Price Index (CPI) rose 9% in the 12 months to April 2022, from 7% the previous month. It will take until June 22 for the May rate to be announced, giving investors some food for thought on the wealth preservation front, with central bank liquidity policies currently the main determinant of equity markets.
There will be investors whose portfolios were designed to sail smoothly through the current market volatility, while others may have liquidated their positions in growth stocks in favor of low-beta options. Beyond equities, growing macroeconomic uncertainties are manifesting themselves in rising negative absolute returns on fixed income securities. Schroders analysts recently pointed out that this could signal that “the opportunity and returns available to investors are now more attractive than they have been at any time in the past 10 years, with the exception of the 2018 Fed hike cycle”.
It’s encouraging in a way. But it could be argued that this is simply a “glass half full” scenario, partly based on the idea that inflation could be peaking and that the hawkish trajectory of central banks is already discounted. on the stairs. The latter assumption seems quite reasonable, but it is hard to imagine that inflation has peaked given the trajectory of energy and input prices, as well as tight labor markets. Indeed, it is likely that central banks will continue to turn the screw if unemployment remains low.
With fixed income absolute returns in the doldrums and inflation on the loose, investors are likely to re-examine the income component of their portfolios. Interestingly, a handful of constituents of the FTSE 350 index have dividend yields that are on par with the rise in the CPI, although any measure makes no sense in isolation and the yield in dividends from a company is simply a function of the market. Tellingly, most of the stocks in question have seen their valuations decline since the start of the year. Some even have dividend restrictions contained in their debt agreements, yet another hangover from the pandemic.
A company such as Rio Tinto (RIO) certainly worth considering given its growth in distributions since 2017 and its apparent willingness to return “excess” earnings via special dividends. Naturally, the miner’s ability to finance further increases is largely tied to global iron ore demand, which is hardly a positive dynamic with stagflation on the horizon. Another high yield like Imperial Marks (IMB) has attractions related to the inelasticity of demand as household budgets tighten, but its ability to maintain, let alone increase, its payout rates must be jeopardized by its huge over-indebtedness in a rate environment rising interest.
A seemingly non-fancy stock, Khaki (PSN) – now trading at a 10% discount to its 200-day moving average – could provide a safer footing on the issue of distributions, even as the homebuilding industry is plagued with multi-year challenges foreheads.
Last year the company was caught up in a tenancy scandal and was forced to repay unfair ground rents to tenants following an investigation by the Competition and Markets Authority.
In April it became the second major homebuilder to announce it had signed the proposed siding pledge in response to the Grenfell fire inquiry. Persimmon has historically built mostly low-rise housing, so it expects its initial provision of £75million will suffice.
Add to that rising interest rates and construction costs, the phasing out of “right to buy” programs, and some potentially unnecessary provisions under the government’s proposed program. Upgrade and Regeneration Billand it’s not hard to see why sentiment toward the homebuilding sector is mixed at best.
Yet Persimmon closed 2021 with a quick ratio of 1.6 and total debt equivalent to 0.4 times cash earnings, or minus 0.8 on a net basis. Taken together, this indicates a strong option on discretionary payments. And the quality of the company’s results translates into a cash flow/total assets multiple of 4.9. Inflation is certainly a significant issue, although strong house prices should offset construction cost inflation by 4.5-5.0% for the year.
Things have changed slightly in the meantime. Persimmon held £446m in cash as of April 22, having returned £399m to shareholders and invested £314m in land assets. The current forward sales position stands at £2.8bn and volume growth for the full year is expected to be 4-7% from 2021 levels. In terms of valuations , the company/cash profit multiple has stretched in recent years, although this does not necessarily indicate that the stock is overvalued. Indeed, the shares are down 28.7% from a year ago and are trading at a 25% discount to the FactSet consensus with a forward-looking dividend yield of 9.1%.
|December 21||December 20||Dec ’19||Dec ’18||Dec ’17|
|Previous balance sheet amount + cash inflows||2007||1,596||1,603||1,789||1,723|
|Free movement of capital||764||747||593||639||806|
|Net Operating Cash Flow||785||766||620||654||824|
|Mergers and Acquisitions||0.9||0.8||0.7||0.5||0.3|
|Purchase/Sale of Investments||1.8||nil||0.9||nil||nil|
|Increase/decrease in cash||770.3||749.1||551.1||483.3||807.2|
|Cash received (paid) from debt activity||-3.7||-4.1||-4.2||-3.9||-3.9|
|Net change in cash (adjusted for currency effects)||19.6||397.4||-197||-251.4||389.7|
|Cash on balance sheet||1,246.6||1,234.1||843.9||1,048.1||1,302.7|