UK Housing Crisis Threatens £9.5 Billion Dividend Bonanza

The era of lavish payouts by the biggest homebuilders in the country is in threat of ending due to Britain’s housing meltdown.

According to calculations by Bloomberg, the four largest UK homebuilders have given away more than £9.5 billion ($11.1 billion) in capital return programs since 2011, luring investors in the age of cheap money needed income.

The biggest homebuilder in the nation, Persimmon Plc, announced last week that it would review its capital return policy, casting doubt on the viability of additional payouts from other homebuilders.

According to Sam Cullen, an analyst at Peel Hunt, “a big part of the sector’s appeal was the era of surplus capital returns.” It was one of the few places you could go to get a good dividend yield because there wasn’t much yield offered in the rest of the market.

Bumper Payouts

Since 2011, UK homebuilders have distributed nearly £10 billion to shareholders.

The largest homebuilder in Britain has since 2012 returned £4.85 billion in the capital, which was further increased through its ordinary dividend program. That is more than twice what was initially anticipated when the plan was first outlined. The large payments result from Help to Buy; a government stimulus program implemented the following year and increased demand for new homes.

After several years of absence from the index, the homebuilder was catapulted back into the FTSE 100 in 2013, a year after announcing its capital return program.

One of the largest UK homebuilders, Berkeley Group Holdings Plc, a rival that profited from cheap land after the global financial crisis, was the first to start making bumper payments to shareholders in 2011. Rivals Taylor Wimpey Plc and Barratt Developments Plc did the same in 2014.

The decision by Persimmon to end its program may signal the beginning of the end of the era in which homebuilders were the darlings of UK stock investors.

Russ Mould, investment director at AJ Bell Plc, stated in a report last week that “investors will now start bracing themselves for lower payments from other housebuilders, especially as Vistry, Taylor Wimpey, and Barratt Developments are all offering a double-digit dividend yield.”

Market Uncertainty

For UK income funds, a popular retirement investment that suffered during the pandemic, dividend income is essential. According to information from Morningstar Inc., the funds, which oversee an estimated £43.6 billion, fell 23% on average this year through October.

When it comes to paying out dividends, the track record of FTSE 100 companies that, on paper, were expected to offer a double-digit percentage yield is abysmal, according to AJ Bell’s Mould. “Persimmon now appears destined to join a dishonorable list.”

However, London-listed stocks currently have a relatively high dividend yield; the FTSE 100’s yield is 3.8% compared to the S&P 500’s 1.7%.

The UK housing market is dealing with several challenges, including rising borrowing costs, inflation driving up material costs, and the possibility of a recession that reduces demand for new homes.

“It is the standard and sensible housebuilder playbook to run for cash when the going gets tough,” said Anthony Codling, a former Jefferies housing analyst who now runs property website Twindig. “It is not Persimmon’s move, but rather the underlying market conditions that have led to the end of special dividends.”

–Courtesy of Iwona Hovenko.