The FTSE 100 might be trading near all-time highs, but not every stock on the index has had luck. Among some of the worst hit is housebuilder Persimmon (LSE:PSN), having fallen 58.9% over the past five years.
The company has now been flagged for likely relegation to the FTSE 250 in the FTSE Russell’s upcoming September quarterly review. Currently valued at £3.87bn, it has the second-smallest market-cap on the index after Entain, another stock flagged for possible relegation.
So what’s the reason for such a collapse?
What’s behind the fall
While Persimmon’s internal operations appear sound, a mix of external factors and macro pressures have led to losses. A brutal combination of cyclical housing weakness and structural cost pressures slashed revenues, pressuring margins and impacting the share price.
Here’s three key reasons for the company’s decline:
- High mortgage rates and elevated interest rates have reduced buyers’ borrowing power, while falling house prices and softer sales have cut volumes and revenues.
- Since 2020, the cost of building a home has risen by around £76,000. Persimmon now expects costs to rise £40m-£50m, with 3%-4% build‑cost inflation throughout 2027.
- Operating profits have fallen about 50% since the 2022 peak. Investors now fear the high‑margin, high‑volume environment’s unlikely to return soon.
- The entire UK housebuilding sector has seen multiple profit warnings and downgrades, while safety regulations and requirements have added complexity and cost, further pressuring the business model.
So what does this mean for investors, and should they be worried?
A risky recovery play
For shareholders (and potential buyers), Persimmon now looks like a high‑yield, cyclical recovery play. But while it has clear income appeal, it still faces risks around margins, volumes and the wider housing market.
Cyclical risk and interest rate sensitivity remain key concerns. If rates remain high or house prices slip further, the next set of results could disappoint, potentially leading to a drawn-out price decline.
Still, the company has committed to a minimum 60p per share annual capital return (currently all as dividends), with a 20p interim already declared for 2026. That gives a yield around 6%, but with profits expected to decline over the next few years, dividend growth’s unlikely.
The valuation is understandably low, with a forward price-to-earnings (P/E) ratio around 11 and price-to-book (P/B) ratio of 1. That makes the current look cheap, but only if the housing market recovers.
Essentially, if rates fall and affordability improves, you’re looking at a high-yielding cheap stock with growth potential. The resulting total return could be significant — but when could that happen? The stock could still fall further from here.
My verdict
Despite the gloomy economic backdrop, Persimmon still has a lot going for it. It benefits from a strong land bank, vertical integration and resilient enough profits to outperform peers in the right environment.
If it can survive this lull until the housing market recovers, it’ll probably bounce back stronger than ever. The question is whether you’re prepared to lock up capital until that happens.
In my opinion, I don’t see any big changes in the immediate future. Based on the income and recovery potential, it still deserves a closer look — but it might be sensible to see how the next few months unfold before making a decision.
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Mark Hartley does not hold any positions in the companies mentioned.
