Citywire for Financial Professionals

View the article online at http://citywire.co.uk/money/article/a645354

Smart Investor: a golden goose for investors' portfolios

Citywire's Smart Investor likes this share that has no debt, is profitable and is in an unloved sector which will benefit from future economic growth.

 
Smart Investor: a golden goose for investors' portfolios

One of my main concerns when selecting companies to invest in is that I avoid the ones which will lose me a lot of money. Sounds simple, but this is the number one goal of the analysis I undertake. Sure, I may miss the odd golden opportunity but, then again, I also tend to miss out on quite a few banana skins.

Furthermore, I have learnt over time that if you are able to avoid disasters then you actually do not need many star performers in order for your portfolio to generate a substantial return and outperform the index. Indeed, if I have a small handful of golden geese in my portfolio, whilst having no dirty ducks, then I am a very happy investor.

Golden goose

One such golden goose is FTSE 250 listed house builder, Persimmon (PSN.L). Having gained 54.8% since I last tipped it as ‘one for your long term portfolio’ (versus a total return of 10.8% for the FTSE 350 over the same period), are shares still worth buying at £7.94 each?

Since I last wrote about the company, it has released a fairly drab set of full-year results for 2011. Whilst it was able to make a net profit in what continue to be highly challenging trading conditions, the bottom line fell from £115 million in 2010 to £109 million in 2011. Furthermore, this equates to a return on equity of just 5.9% which shows that Persimmon is not exactly hugely profitable at present.

Meanwhile, although dividends per share were increased by 33%, shares currently yield just 1.3%. Indeed, Persimmon’s payout ratio is incredibly mean at 28% and shows that the company is being highly conservative, which is understandable given the current economic climate.

Interestingly, much of the profit has been used to pay off borrowings, with Persimmon now having no debt. This again shows how conservative management are being and provides a vast amount of potential for the company to ‘gear up’ when the UK economy does (eventually) pick up. This fact should not be overlooked by investors; the disappointing ROE figure can be substantially inflated via the company taking on only a moderate level of debt in future years.

As for an economic moat, the house building sector is hugely dependent on the performance of the economy. As such, until the UK economy picks up it is unlikely that net profit will increase significantly. Indeed, as regular readers will know I attest to the economic cycle and realise that booms and busts never last forever. So, whilst it may take a while yet, I believe the UK economy will return to growth and the house building sector will return to far higher levels of profitability.

Still in survival mode

With shares currently trading at £7.94, Persimmon’s price to earnings ratio is 22, whilst its price to book ratio is 1.3. Although the P/E (price to earnings) ratio is excessive, this is a company which is still in survival mode owing to incredibly difficult trading conditions. Furthermore, it has no debt, is profitable and is in an unloved sector which will benefit from future economic growth.

Sure, its yield is poor, ROE is disappointing and valuing it based on current profitability makes it seem expensive. However, it remains a high quality company which has the potential to deliver significant returns for long term investors. The share price may not perform as well in 2013 as it has done in 2012 but this company and sector has a healthy long term future.

Smart Investor holds shares in Persimmon

25 comments so far. Why not have your say?

dave sullivan

Dec 19, 2012 at 13:16

What about the promise to return 1.9 billion to shareholders over the next 9 years? Perhaps this is why the shares look a bit expensive

report this

ERic Hancock

Dec 19, 2012 at 14:31

Yes, Dave S - when you take that promise into account, the divi is VERY good indeed - but no need to rush. Buy on dips, IMHO

EricJH

report this

dave sullivan

Dec 19, 2012 at 21:00

Cheers Eric H, I'm not rushing in. I bought when SI recommended them last time. Holding for now :)

report this

snoekie

Dec 19, 2012 at 21:12

F*** your pop ups!

report this

Forestbhoy via mobile

Dec 19, 2012 at 22:58

More profit to be had long term in barretts and Taylor wimpey IMHO .

report this

rik

Dec 19, 2012 at 23:00

Eloquently put snoekie!

report this

Christopher

Dec 20, 2012 at 06:45

Your pop=ups are PLEBS

report this

Bestmate

Dec 21, 2012 at 16:44

Get rid of the pop ups please.

report this

Tortoise1000

Dec 23, 2012 at 10:24

Yes please, where have there pesky popups come from? Go away! I do not need a whistle-stop tour of my finances, thank you very much.

report this

Income Investor

Dec 23, 2012 at 10:47

I bought PSN when they were an income play as a bit of a gamble on a housing recovery. Not my best call... they slashed the divi and a housing recovery is nowhere to be seen. Now I continue to hold for a recovery as I agree that their business model is sound. But this one of my 'sell when the price recovers' shares.

As for the pop-ups: why do websites put them on - they only annoy!

report this

Suze Jamieson

Dec 23, 2012 at 11:40

Yes, please get rid of them - they're unbearable - especially when I've already seen the title of the article listed on the email alert, so I'v e already decided whether or not to read it thanks!!

report this

Ivor Nestegg

Dec 23, 2012 at 12:09

"Yes please, where have there pesky popups come from? Go away! I do not need a whistle-stop tour of my finances, thank you very much."

======================================================

Me too! A blasted nuisance (to put it mildly!)

report this

Ivor Nestegg

Dec 23, 2012 at 12:12

P.S I had literally just posted the above when the "pop up" "popped up" again.

GRRRRRR!!!!!!!!!

report this

Nicholas Mears

Dec 23, 2012 at 16:29

Want to get rid of the Pop-ups, All the Ads?

Got Google Chrome/

Go to the Google Chrome Apps, Download Ad Blocker,

They all get blocked.

report this

Suze Jamieson

Dec 23, 2012 at 17:45

Is that an app you have to buy, or is it part of the Chrome package - I couldn't find it (but it sounds like just what I want for Christmas!).

report this

Nicholas Mears

Dec 23, 2012 at 19:34

Hello Suze, its free and works.

I just looked but could not find it either, that is how I got it about a year ago.

However, just Google "Adblock Plus Chrome", it will come up and you should be able to download it from there.

You are easily pleased if its all you want for Christmas!

Let me know if it woks.

report this

ZEBRA

Dec 24, 2012 at 10:51

Nicholas,

I have just successfully downloaded Ad Blocker for Firefox.

I shut down computer and re-opened Firefox.

The pop ups are still there!!!

Any ideas?

Zebra

report this

Tortoise1000

Dec 24, 2012 at 11:19

Yup, same here. I always use Firefox ad blocker, it works well, but it does not stop the pesky popups on here. Maybe they are a new kind of super bug?

report this

Magic Monty

Dec 24, 2012 at 11:23

What, more like dead goose, there is no value at all at this price. it's capitalised at more than it's sales number. I bet Smart Investor has loads of these and getting ready to unload.

Go buy something like Shaftsinkers if you want something that makes real products its 10 times better value. Or if you want dividends go buy ALPH and make 15% pe year and get a share at real value. I could write pointless articles like this all day long but gotta a real job.

I really wonder how people decide to write articles based upon the most mundane of stocks...Push Push eh.

Merry Christmas.

report this

Suze Jamieson

Dec 24, 2012 at 11:40

Me too!! Come for Christmas - we'll keep you busy!!

report this

Nicholas Mears

Dec 24, 2012 at 16:49

I am no expert at this, but the pop ups you can block altogether,

but often you need them on a site, e.g. if you are form filing or

buying something.

You can control them however, too complicated too explain here,

but Google "Pop Ups Google Chrome" and you can read all about how to manage them.

Hope this helps

report this

Suze Jamieson

Dec 24, 2012 at 19:02

Ok - I'll go do sopme research - Happy Christmas and thanks for the tips!

report this

paul kaye

Dec 29, 2012 at 14:14

one of the last shares I would buy is,a housebuilder! dont you know the state of the housing market? stay clear for now.

For me its telecoms,like talk talk, and companies like William hill, EROS,entertainment one,Legal and general,vodafone.

report this

paul kaye

Dec 29, 2012 at 14:15

photome is another share going places

report this

medved bear

Jan 06, 2013 at 14:45

If you like being spied on then get Google Chrome. It can also see through your webcam. Enjoy ! (if you like that sort of thing.)

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Look up the shares

  • Persimmon PLC (PSN.L)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Pension power! How investment trust plans compare

by Gavin Lumsden on Oct 31, 2014 at 16:36

Sorry, this link is not
quite ready yet