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Despite multiple economic and geopolitical headwinds, the FTSE 100 set a record high earlier this month. But some of its constituents aren’t doing nearly as well. The value of one in particular is now down over 20% in the last year. Unfortunately for me, I own a slice of it.
Passive income: unlocked
The stock in question is housebuilder Persimmon (LSE: PSN).
Now, I’ll make it clear that I never expected my stake to deliver a magnificent capital gain in a short period of time. Indeed, I was more than prepared to sit tight for a while and collect a nice dividend stream while the housing market stabilised.
As far as the latter is concerned, my plan has worked well and a lovely wedge of cash has been hitting my Stocks and Shares ISA every six months. Moreover, the dividend yield currently stands at a chunky 5.3%. That’s significantly more than the 3.3% average in the FTSE 100.
The problem is that holding a stock for the passive income it generates only makes sense up to a point. And the derisory performance of the share price has left me questioning whether that point has been reached.
Let’s be fair
Of course, I could argue that a lot of the recent movement has been beyond the firm’s control. The UK economy is hardly firing on all cylinders right now. By association, this was always likely to impact the housing market. And it’s not like any of its peers are doing any better.
The larger-than-expected rise in UK inflation to 3.6% is hardly ideal either. It makes the Bank of England’s next move on interest rates — due on 7 August — harder to call.
A reduction from the current rate of 4.25% could entice more buyers to enter the fray — likely good news for the Persimmon share price. This might be further boosted if the market likes what management has to say when half-year numbers are revealed only a few days later (13 August).
A pause in rate cuts would clearly be more problematic.
But is the bad news already priced in?
The shares currently change hands at a price-to-earnings (P/E) ratio of almost 13. That’s not ludicrously expensive; it’s bang-on average for stocks in the UK’s top tier.
There’s even a possibility that this might look like a bargain in time. The fact remains that supply of quality housing in the UK still lags demand. As one of the heavyweights in the industry (and one that focuses on building more affordable abodes), this could be a powerful tailwind for Persimmon.
Another positive is that the company isn’t really vulnerable to tariff-related shenanigans. This is not to say the share price won’t fall along with those of more exposed members of the FTSE 100. But it might be looked on more favourably by investors if volatility returns to the index.
Staying put
Taking the above into account, I’ve decided to stick by this stock for now. While I would hope to see a recovery in the share price soon, I’m also comforted by the knowledge that Persimmon represents my only direct exposure to the property market in my portfolio.
If I weren’t sufficiently diversified elsewhere, I might be saying something different.
