Must read: Legal & General, Persimmon

Persimmon (Tues 10 March)

Challenges have, of course, been many and varied in this most cyclical of sectors and Persimmon (LSE:PSN) has not been exempt with the shares having fallen by 10% over the last week amid the wider gloom. Uncertainty, mortgage availability and affordability concerns, slowing construction activity and pressures arising from increases to the likes of National Insurance and stamp duty are meaningful headwinds.

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That being said, there are a number of tailwinds which could yet revitalise the sector. More broadly, there remains a noticeable supply shortage of homes domestically, government reforms to planning should oil the wheels of being able to break ground, and the recent interest rate cut is a step in the right direction if not the ultimate goal, which should improve mortgage availability and affordability. At the same time, the group previously noted that for some, inflation-beating pay rises and the relaxation of lending rules has led to higher enquiry rates.

In the meantime and for its part, Persimmon is opening its strategic doors where possible. Over the first half, the group made £210 million of land purchases at what it described as “excellent margins”, adding to one of the core parts of the investment case for the housebuilder, namely its land bank, which now stands at 84,750 plots compared to 82,000 previously.

In addition, the group operates three manufacturing facilities to make its own timber frames, bricks and tiles. It estimates that this saves around £5,500 per plot on building costs, and indeed there is now demand coming from elsewhere for its bricks in particular. At the same time, the group has launched its “New Build Boost” scheme in an effort to ease some of the affordability concerns of potential buyers.

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For the full year, Persimmon expects housing operating margin to come in at the lower end of the guided 14.2% to 14,5% range, although more promisingly pre-tax underlying profit should be at the upper end of the £415 million to £440 million range, then rising to between £461 million to £487 million the following year.

Investors had begun to factor in the potential turnaround in fortunes for the housebuilders, and as the preferred play in the sector Persimmon saw some benefit. The shares have risen by 15% over the last year, although they remain down by 52% over the last five years. From an investment and valuation perspective, however, there may well be plenty more gas in the tank, while a dividend yield of 4.4% effectively pays investors to wait.

Legal & General (Wed 11 March)

While Legal & General Group (LSE:LGEN)'s plan is clearly coming together, this has not fed through to the share price against heightened expectations, where the price has risen by just 4% over the last year and by 5% over the last two years.

However, seen through the longer-term prism in which the group operates, prospects are bright. L&G is in a new phase and is executing at pace and announced a 28% rise in pre-tax profit at the half-year results, which exceeded entirety of the previous year’s contribution.

The group’s strategy is now playing out, with the previously announced non-core sales of its US Protection business for £1.8 billion and Cala for £1.35 billion, which will result in a further share buyback of £1 billion when completed, on track. This was in addition to the £200 million buyback recurring annual programme. Separately the group also acquired Proprium Capital Partners, enhancing its capabilities in key growth markets and has secured a long-term partnership with Blackstone to underpin its credit platforms.

Indeed, the group’s financial strength enables a target of some £5 billion to be returned over the next three years in dividends and buybacks. In line with its announced growth target, a dividend yield of 8.4% is a heady level, paying investors handsomely to wait as the strategy unfolds. As such, the stock has become something of an income staple over recent times.

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Perhaps the shining light for the group is the self-feeding, virtuous circle which is created by its sprawling and largely interconnected businesses. The structure of the group allows the generation of assets through its bulk annuity, or PRT business, to then be managed by other parts of the group. Indeed, such is the dependency and connection between the units, a multi-decade customer relationship is usually achieved as the customer switches between requirements as time passes, from the initial investment and growth stage to the drawdown and withdrawal chapter. As such, the reliability of the relationship and the ongoing fees enables a certain visibility of earnings over the longer term.

There is little doubt as to the longer-term potential for the savings and investment market, especially given ageing demographics and likely welfare reform and the proposed international expansion adds another tantalising string to the group’s bow. A strong set of numbers could yet entice unconvinced investors back into the fold.