Blackfriar: Persimmon cheer for investors but maybe not coalition

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PERSIMMON’S plan to hand £1.9bn to its shareholders over the next decade rewards investors who have stuck with the group through the credit crunch, recession and subsequent economic quagmire.

The York-based builder has consistently been one of the UK’s stronger builders – avoiding the need to ask shareholders for cash during the recession, unlike many of its peers, and eradicating debt from a peak of £1.2bn in 2008.

Now it’s doing the opposite of begging for cash, revealing a ‘game-changing’ plan which sent its shares up 20 per cent on Tuesday.

Persimmon’s capital returns plan – doling out £6.20 per share over the next 9.5 years – follows upmarket housebuilder Berkeley Group’s decision to return £1.7bn to investors, announced earlier this year. Taylor Wimpey yesterday hinted it could follow suit – once its business is in shape.

“Not immediately... but as we get into a stronger market, business will generate an awful lot of cash and we do think that it is appropriate to return that cash to shareholders,” said Taylor Wimpey chief executive Pete Redfern.

Persimmon claims it won’t stop buying land or expanding output, nor will it use debt to fund the ambitious dividend programme.

“We’re working at a volume which is at a level which matches the market,” said group managing director Jeff Fairburn. “We will move with the market. We can increase the volumes to match the market.”

He said the key to increasing demand, and hence Persimmon’s output, is better flows of mortgage liquidity.

But Blackfriar can’t see these dividend programmes helping ease the UK’s housing shortage. While Persimmon’s duty is clearly to its shareholders, this means £1.9bn which could have been spent erecting homes will instead be lining investors’ pockets.

So while it cheered investors, it can’t have pleased the Government, which will be watching nervously as the listed housebuilders set a new standard of high shareholder returns but cautious output growth.

From the builders’ side, it’s clear to see why they and their shareholders prefer this capital returns approach. Persimmon’s land bank already provides a whopping 6.7 years’ supply, so there’s little point buying much more land to simply sit on it.

Churning out a lot more houses risks depressing prices and cutting builders’ returns, plus it could push up land prices and force them to overpay for it.

“They’re doing what they should be doing,” said Peel Hunt analyst Robin Hardy. “It shows a far more disciplined approach to the cycle and means that Persimmon will not be drawn back into a destructive volume spiral.”

But Mr Hardy admits there “is a risk of further under-provision of housing”.

“It’s not quite clear what the state does. It’s the state’s responsibility to ensure the adequate provision of housing.”

Government’s hands are tied. It is trying to boost housebuilding with a myriad of incentive schemes, with catchy names such as FirstBuy, HomeBuy Direct and NewBuy. It can coax and cajole all it likes, but housebuilders will serve their shareholders first.

For a regulator that went AWOL in the run-up to the financial crisis, it’s hardly surprising that the Financial Services Authority is now flexing its muscles over every possible infringement of consumer rights.

The City watchdog has been quick to trumpet its consumer champion tune over CPP Group, citing “serious concerns” about the York-based credit card insurer’s sales tactics.

But Blackfriar can’t help thinking it’s a couple of years too late. When CPP floated on the stock market in March 2010 it had been through an extensive due diligence process, including close scrutiny by the FSA. If the FSA felt CPP’s insurance for credit cards was a flawed part of the product, that was surely the time to ring alarm bells.

Now, its clampdown threatens more than 1,300 jobs in the UK. CPP’s business partners, the likes of Nationwide and Royal Bank of Scotland, are mulling whether to extend contracts.

Its lenders, one of which is also RBS, are also reportedly refusing to extend its loan facilities. Many questions remain over what happens next for CPP. Should it survive the FSA debacle, Blackfriar would not be surprised to see the company re-launch without insurance. This would take it away from the FSA’s reach, and see it remain as a pure ‘life assistance’ firm.

It will likely be a smaller firm and Blackfriar fears staff will suffer as it cuts costs. Whether it remains a public company is also up for debate, as many investors have been severely scalded by the steep fall in its share price.

But Blackfriar can’t see its founder and 57 per cent shareholder Hamish Ogston buying back the firm after pocketing £120m at its float.

While the agreement in principle with the FSA lifts some uncertainty, CPP will need much more clarity before it is out of intensive care.