Persimmon earnings preview

Can the UK housing firm with the highest profit margins in the industry keep up the pace as house prices decline?
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What do you have to offer?

One of the main reasons for investing in Persimmon is its relatively high dividend yield. This has been possible thanks to wide profit margins, in part driven by increased housing demand since the pandemic. However, ONS House Prices dropped in July for the first time in months, and higher interest rates might be fanning headwinds for the rest of the year. Therefore, it wouldn't be surprising if Persimmon's Board decided to keep more funds for a rainy day and be nowhere near as generous with the dividend this time around.

The number of mortgage approvals in the UK has been falling since January, which isn't surprising as mortgage rates have been rising with monetary policy tightening. Now that the BOE is warning of an impending recession, fewer people might be willing to buy. That could already be seen in Persimmon's interim trading statement in July, where it reported just 6.7K home completions compared to 7.4K in the prior year. And management provided a gloomy outlook.

Where to now?

Traders are likely to be focused on cancellation rates and order books. That could give some insight into the firm's profitability for the rest of the year, and the potential for maintaining dividends. Persimmon has been paying out nearly most of its profit to shareholders, so any guidance on future dividend policy will also likely be key to price action.

In its latest trading update, Persimmon forecast completing 14.5-15.0K homes this year, supported by being 75% forward sold. If the company were to reduce those indicators, it could also hurt the stock price. After all, it's hard to keep up a 12% annual rise in sales prices when interest rates are expected to keep rising.

Stock price subdued below 50SMA

PERSIMMON stock has been declining steadily since last June when the price was nearly double what they are now. Buyers had an attempt at the 50-day average back in May but the move was quickly repelled and bears sent prices down to a 2.5-year low at 1720. More recently, they took another shot at the SMA, but ‘fell short’ near 1900. As a result, a range has formed. If bulls keep disappointing the likelihood of breaking the 1720 low could pave the way for successfully reaching the next major support at the 1500 mark.

Otherwise, the 2000 level would be major resistance above the cluster top as it coincides with the bearish trendline coming down from below the 3000 mark. In the event buyers find the RSI momentum strong a signal, Persimmon stock might see a recovery towards the 2170 gap.

Key takeaways

Persimmon's poor recent performance and the likelihood of recession amongst other things suggest that dividends won’t be as generous this time around. Traders will be looking to see if Persimmon's cancellation rate and order book is still strong. This will reflect on future profitability and their ability to maintain dividends while interest rates rise and home indicators fall.