(Alliance News) - Persimmon's rethink on dividends might not have curried any favour with investors, but it seems "sensible" to AJ Bell's Russ Mould, and its peers could follow suit.
On Tuesday, the York-based housebuilder said its previous capital return programme is to be replaced with a new, forward-looking capital allocation policy.
"Ordinary dividends will be set at a level that is well covered by post-tax profits, thereby balancing capital retained for investment in the business with those dividends. Any excess capital will be distributed to shareholders from time to time, through a share buyback or special dividend," it said.
The change is in light of "increased uncertainty" in the political and macro-economic backdrop, as well as higher corporation tax and residential property developer tax.
It will announce the 2022 dividend per share in March next year, alongside its annual results.
"Guided by the new policy, when proposing the 2022 dividend the board will carefully consider the business' performance, financial position and outlook at that time," the housebuilder said.
It noted there will be a special distribution for 2022, with dividends from financial 2023 onwards to be paid semi-annually. It expects an interim dividend for 2023 to be paid in the second half of the year.
Investors did not take the news well, with Persimmon shares trading 6.1% lower at 1,242.00 pence each in London on Tuesday afternoon.
"The record of FTSE 100 firms that on paper were due to offer a double-digit percentage dividend yield is particularly bad when it actually comes to handing over the cash," said AJ Bell investment director Russ Mould.
Mould notes that Persimmon is set to join an "inglorious list" that includes Vodafone Group PLC, Shell PLC, Centrica PLC, and former FTSE 100 constituents Marks & Spencer Group PLC, Evraz PLC and International Distributions Services PLC, when it was trading as Royal Mail.
Consensus forecasts implied an 18% dividend yield on Persimmon stock before it announced the revision to capital allocation.
Whilst the move to cut dividends might be unpopular, it looks "sensible" to Mould. With a slowing housing market, and sticky input cost inflation, having cash at hand will be vital, he said.
For the four months and a week from July 1 to November 7, the firm reported forward sales reserved beyond the current year of GBP770 million, down from GBP1.15 billion a year prior. It also saw a drop in average net private weekly sales rate per outlet, down to 0.60 from 0.78 the previous year.
While Persimmon said it was on track to deliver its full-year volume target guidance of 14,500 to 15,000 homes, it noted that in the last six weeks, cancellation rates have increased to 28% from 21% in the preceding 12 weeks from July 1.
The souring outlook for the sector was mirrored in the latest data on the UK construction industry last Friday. The S&P Global/CIPS UK construction purchasing managers' index rose to 53.2 points in October from 52.3 in September.
While output increased, the survey showed new work had fallen for the first time since May 2020, and business confidence reached its lowest levels since the early months of Covid.
"Preservation of cash will be key, not just because of the threat of a recession. This is partly because a strong balance sheet protects the company from the ravages of any downturn in the economy, profits and cash flow," Mould continued.
Another factor for Persimmon and the wider housebuilding sector is the cost of cladding remediation. On Tuesday, it announced it would be adding GBP275 million to the provisions for cladding remediation, which takes the total to GBP350 million.
This still puts Persimmon some way behind peers Bellway PLC and Barratt Developments PLC, whose cladding remediation costs total GBP485 million and GBP580 million respectively.
An additional advantage of having increased liquidity during an economic downturn is the ability to purchase land at lower prices, Mould noted.
"The real secret sauce to being a successful housebuilder is buying land at the right time of the cycle, because snapping up lower-cost plots during a downcycle gives the builder the chance to ride house price inflation in the next upcycle," Mould contends.
Even after paying the GBP750 million in total capital returns in the year to date, Persimmon expects to have GBP700 million in net cash at the end of the calendar year.
"Retaining at least a portion of the GBP750 million dividend pay-out will give Persimmon an extra line of defence and additional financial flexibility and it seems likely that investors will now start bracing themselves for lower payments from other housebuilders, especially as Vistry, Taylor Wimpey and Barratt Developments are all offering a double-digit dividend yield, according to current consensus forecasts," Mould continued.
By Elizabeth Winter; elizabethwinter@alliancenews.com, and Holly Beveridge; hollybeveridge@alliancenews.com
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