An 18% dividend yield from a FTSE 100 stalwart! But can I trust it?

Amid worsening economic conditions, many companies on the FTSE 100 have performed poorly for shareholders this year. Housebuilders are among those that have performed especially poorly.

The biggest dividend payer on the index at the beginning of the year was Persimmon (LSE:PSN). And that’s still the case. But with the share price tanking — down 52% over the year — the dividend yield has soared. In fact, the housebuilder’s yield now stands at 18%.

Now that definitely seems unsustainable. Huge dividend yields are normally something to be wary of rather than embraced. After all, there is no guarantee the company will continue its payout. But let’s take a closer look at this company’s fortunes.

Economic challenges

As a whole, 2022 looks set to be a positive year for Persimmon. House prices had been climbing and volumes were close to pre-pandemic levels. The average selling price for a new home built by the company rose by £9,400 year on year, to almost £246,000 during the first half. 

However, things don’t look too rosy in 2023. Interest rates are rising and appear to be dampening demand for new homes. Analysts at Jefferies have provided a fairly bleak outlook. They expect a 25% drop in private volumes for 2023, alongside a 10% drop in home pricing and cost inflation of approximately 8-10%.

However, this is among the most negative forecasts that I’ve seen and it’s entirely possible that the industry will show more resilience than expected. Further changes in the interest rate and the government’s budget will likely have a sizeable impact on this.

Dividend in danger?

I wouldn’t be surprised to see the dividend cut in the near future. Earnings at Persimmon are expected to only just cover this year’s total cash return, giving it a coverage ratio of around one. A healthy coverage ratio is normally around two. However, even if the dividend yield were halved, it would still be some distance ahead of the index average.

Too cheap to ignore?

Persimmon shares have been trading near their lowest points in 10 years — even lower than during the first lockdown. Jefferies has warned that “bottom fishing in the sector might prove premature“, but I’m not too sure.

The question for me isn’t necessarily being in at the absolute bottom, but looking at where the Persimmon share price will be in the medium-to-long term. As such, looking further into the distance. I think Persimmon looks like a good buy now. In fact, I’ve recently bought more of this housebuilder stock and I’d still buy more.

The reasoning is that while there might be some near-term challenges, housebuilders don’t appear to be in existential danger. And in the long run, I think demand for new homes will return. After all, there is, and has been for a whole, an acute shortage.

Moreover, Persimmon is among the least impacted housebuilders by the fire safety pledge. The company’s costs are estimated to be around 10% of 2021 profits.

The post An 18% dividend yield from a FTSE 100 stalwart! But can I trust it? appeared first on The Motley Fool UK.

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• A cheap FTSE 100 dividend share I’m holding and one I’d sell!

James Fox has positions in 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.