Shares of York-based house building giant Persimmon plc fell about 10% on Wednesday after it slashed its dividend from 235p per share to 60p and warned that 2023 “promises to be a tough year.”
The FTSE 100 firm’s shares are down more than 40% for the past year.
Nonetheless, Persimmon said 2022 revenue rose 6% to £3.82 billion and underlying profit before tax grew 4% to £1.012 billion.
Reflecting a £275 million exceptional charge for building safety remediation made in the year, reported profit before tax fell to £730.7 million from £966.8 million.
Persimmon said its cash generation was strong at £1.002 billion before capital return of £750.1 million — reflecting the 235p dividend for 2021 — and net land spend of £637.6 million.
Cash held at December 31, 2022, was £861.6 million.
Persimmon said dividends of 125p (£399m) and 110p (£351.1m) per share were paid on April 1, 2022, and July 8, 2022, respectively, representing the capital return for 2021.
However, the firm added: “A new capital allocation policy was announced in November to deliver sustainable returns to shareholders …
“Alongside this the board considers our current assessment of prevailing market conditions, the sector’s increased tax contribution and building safety remediation costs …
“For 2022, the board proposes a final dividend of 60p per share to be paid on 5 May 2023 to shareholders on the register on 14 April 2023, following shareholder approval at the AGM. This dividend is the final and only dividend in respect of financial year 2022 …
“For 2023, the board’s intention is to at least maintain the 2022 dividend per share with a view to growing this over time …”
Persimmon chairman Roger Devlin said: “I am pleased to report that Persimmon had a strong year in 2022. For the first time in our 50 year history we delivered five star quality and service while also achieving underlying pre-tax profits in excess of £1 billion.
“By contrast 2023 promises to be a tough year, albeit largely for reasons beyond our control.
“While I am confident that our attention to build quality and customer care will remain undimmed, we will inevitably see a sharp fall in the number of completions as well as a decline in profitability as a consequence of the nationwide diminution in demand for housing arising from higher mortgage rates and challenging economic circumstances.”
Persimmon CEO Dean Finch said: “… the market remains uncertain. Our marketing campaign has helped improve the group’s sales rates in the new year from the lows at the end of 2022, but they still remain lower year on year.
“We have carefully managed our pricing, recognising the improved value and energy efficiency of our product in these difficult times and sales prices have proved resilient.
“We responded quickly to stimulate sales, enhance cost controls and preserve cash, promptly slowing new land investment in the fourth quarter of last year.
“Nonetheless, the sales rates seen over the last five months mean completions will be down markedly this year and as a consequence, so will margin and profits. However, it is too early to provide firm guidance …”
Aarin Chiekrie, equity analyst at Hargreaves Lansdown: “Persimmon’s continuing to feel the effects of a shaky housing market.
“While revenues increased this year thanks to higher house prices and a greater number of completions, the outlook’s not so rosy next year.
“If current sales rates persist for the rest 2023, full-year completions are expected to fall by more than 40%, which would take a huge bite out of revenues.
“And while underlying operating profits rose to £1bn, bear in mind that figure adds back a huge £275m adjustment related to expected costs for removing combustible cladding.
“The longer-term fundamentals of the UK housing market remain strong, but short-term headwinds are creating lots of waves for Persimmon.
“On one side, higher mortgage rates and a cost-of-living crisis are already stretching consumers’ incomes thin. On the other, significant build cost inflation is squeezing Persimmon’s margins.
“Recession fears aren’t going to abate anytime soon, so efforts to conserve cash now are a wise move, but the market hasn’t liked a 75% cut in the dividend.”
Richard Hunter, Head of Markets at Interactive Investor: “Persimmon has ground out a creditable performance considering the challenges of the last year, although the current outlook is rather more troubling.
“The private weekly sales rate is a case in point. This rate came in at 0.69 for the year, although in the last quarter the number fell to 0.3 (and as low as 0.19 following the mini-Budget fiasco).
“Following some marketing initiatives the rate has improved to 0.5 for the first few weeks of this new financial year, although this compares with 0.96 a year previous.
“The challenges are stark and likely to lead to a difficult 2023 for the sector as a whole, which has been reflected in some dismal share price performances across the piece.
“Concerns over mortgage affordability given the cost of living crisis, mortgage availability amid rising interest rates, persistent build cost inflation of between 8% and 10% and shortages of both materials and labour have created a toxic cocktail.
“In addition, Persimmon has taken a charge of £275 million (and is raising this to £350 million), which has had a material impact on a pre-tax profit number which reduced from £967 million to £731 million.
“As such, the group has tightened its cost management and significantly reduced new land purchases, only acquiring land on a highly selective basis. More positively, some of the build cost inflation has been mitigated by the group’s vertical integration, with its in-house access to bricks, tiles and timber frames providing a competitive edge.
“The dividend is also a casualty of the general belt-tightening exercise. A reduction from 235p to 60p for the year significantly reduces the previously mid-double digit yield, although the new projected yield of just over 4% remains attractive if low by recent historical standards.
“With some investment being required to maintain its land bank, net cash has fallen from £1.25 billion to £862 million, although this leaves a sufficient amount of firepower to continue its selective acquisition opportunities.
“Given the backdrop, there are a number of factors which display Persimmon’s resilience in the face of an economic cycle which has turned against it.
“Underlying pre-tax profit rose to £1 billion from a previous £973 million and revenues increased from £3.61 billion to £3.82 billion, in excess of the expected £3.79 billion.
“In addition, average selling prices rose by 5% which provided a small tailwind, and new home completions rose marginally to 14868 from 14551, which is a notable achievement in the circumstances.
“The underlying profit margin of 27.2% is largely in line with the previous year, but herein lies another potential issue.
“The company has guided that in the event of continuing inflation and, coupled with the level of sales currently being seen, this number could take a hit of anywhere between 5% and 8% in the current year, inevitably having a large effect on profitability. Based on the current environment, completions could also fall markedly to a range of between 8000 and 9000 this year.
“All things considered, the housebuilding sector is one which is currently fraught with difficulties and the share price performance reflects the changing of the tide.
“Over the last year, Persimmon shares have fallen by 40%, as compared to a jump of 7.4% for the wider FTSE100, despite a more recent relief rally of 14% over the last three months, which has been largely undone in early trade following these results.
“Perhaps more noticeable is the effect on the general view of the shares. After some considerable time of a positive consensus which included Persimmon as one of the preferred plays, the market consensus of the stock has now switched to a sell, implying that in terms of the economic cycle, the worst may yet be to come.”