When considering stocks to buy, many investors use popular valuation tools, like the price-to-earnings (P/E) ratio and dividend yield, to determine value for money. Here’s one stock that looks particularly attractive using both measures.
But is there a catch? Let’s see.
Then and now
In 2025, Persimmon (LSE:PSN) – the housebuilder – reported earnings per share (EPS) of 99.6p and declared a dividend of 60p. Based on a current (13 June) share price of £10.60 it means the stock trades on a multiple of 10.6 times historic earnings and offers a yield of 5.7%.
In isolation, these numbers appear impressive. They suggest that, as a minimum, the stock offers good value. Indeed, some might argue that it’s a bit of a bargain.
But the group’s share price tanked following the pandemic and a cut to its dividend. Its shares have also taken a bit of a battering since the start of the current conflict in the Middle East.
In early 2020, Persimmon’s shares were changing hands for just over £30.50. It was about to announce EPS for 2019 of 269.1p and a full-year dividend of 235p. In other words, it had a P/E ratio of 11.3 and a yield of 7.7%.
What does it tell us?
Based on earnings, its suggests Persimmon offers some value but, in my opinion, it isn’t an amazing bargain.
If it was valued at 11.3 times its 2025 earnings, it would have a share price of £11.25, approximately 6% higher than it is today. Looking at analysts’ forecasts for 2027 (EPS of 120.2p), a price of £13.58 could be justified.
Even so, income investors are likely to be disappointed with the percentage drop in its yield.
But the group is being cautious with its dividend. In 2019, it returned 87.3% of its earnings to shareholders. For 2025, it was 60%. If it had the same payout ratio now, its yield would be higher than five years ago.
And despite the well-documented problems affecting the housing market over the past five years, a comparison of the group’s December 2019 and December 2025 balance sheets indicates it’s in better shape. Overall, its book value has increased by £356m (10.9%). Impressively, it still has no debt
My view
Investors – and the group itself – are clearly concerned that the green shoots of a recovery in the housing market that were starting to show earlier in the year could disappear again. The closure of the Strait of Hormuz is expected to increase inflation and lead to a rise in borrowing costs. This would be bad news for Persimmon. Not only would mortgages become more expensive but its margin could be squeezed.
However, the fundamentals of the housing market are likely to help the group. There’s an under-supply of new properties, which the government’s planning reforms are trying to address. Also, few are predicting the inflationary effects from the Iran war to be long-lasting.
If Persimmon continued to pay a dividend of 5.7% — and the group’s share price reached £13.58 within the next 12 months — it would be an overall return of 32%. In my opinion, figures like these — along with the country’s chronic housing shortage — mean it could be a stock to consider for both capital growth and income.
Should you invest £5,000 in Persimmon Plc right now?
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James Beard owns shares in Persimmon plc.
