With inflation set to reach record highs of 10%, I’m looking for inflation-beating stocks for my holdings. One way to do this is to identify stocks that offer a dividend yield above these levels. FTSE 100 incumbent Persimmon Homes (LSE:PSN) does just that.
As a quick reminder, Persimmon is one of the largest house building companies in the UK. Headquartered in York, it operates 31 regional offices throughout the UK. Last year alone it built and sold close to 15,000 homes.
So what’s happening with the Persimmon share price currently? Well, as I write, the shares are trading for 1,755p. At this time last year, the stock was trading for 2,936p, which is a 40% drop over a 12-month period.
I believe Persimmon shares have dropped due to current macroeconomic headwinds, one being soaring inflation. I’m not worried about these issues too much as I don’t believe they will be with for the longer term.
FTSE 100 stocks have risks
As mentioned, soaring inflation has caused issues for many businesses, including Persimmon. The rising cost of raw materials has meant that profit margins are being squeezed. In addition to this, the global supply chain crisis has had a material impact on operations for firms like Persimmon. Both of these issues can impact performance and shareholder returns.
The house building market is a saturated and competitive sector. Each business is positioning itself to dominate the market and offer the best quality and value. Persimmon is part of this fight to dominate but losing to competitors could have an impact on performance and returns too.
The bull case
Firstly, Persimmon shares look great value for money on a price-to-earnings ratio of just over seven. The general consensus is a P/E ratio of below 15 is good value for money.
So what about returns then? Well, Persimmon shares currently offer an inflation-beating dividend yield of 12.5%. It is worth remembering that the FTSE 100 average is 3%-4%. I am aware that dividends can be cancelled at any time at the discretion of the business, however.
Performance underpins shareholder returns and dividend payments. Past performance is not a guarantee of the future, but I review this to gauge investment viability. Looking back, I can see Persimmon has a consistent record of revenue and profit generation, which has underpinned impressive returns. Results for 2021 showed trading returned close to pre-pandemic levels.
Finally, the housing market here in the UK is another reason I’m bullish on Persimmon shares. Although shorter-term demand may be curbed by rising interest rates, longer-term demand will only increase, in my opinion. This is because there is a major lack of housing in the UK relative to overall demand. This should benefit Persimmon and boost performance and returns.
Overall, I believe Persimmon is an excellent FTSE 100 stock to try and beat soaring inflation levels. At current levels, the shares look dirt-cheap and I’d expect the dividends to continue for a long time. I would add the shares to my holdings.
The post Here’s 1 FTSE 100 stock with an inflation-beating dividend yield! appeared first on The Motley Fool UK.
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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.