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Taylor Wimpey shares (LSE: TW) are (as Winston Churchill once said of the Soviet Union’s policy pre-WW2) a riddle wrapped in a mystery inside an enigma. I bought them a couple of years ago when the yield topped 7%, and the stock traded at just six or seven times earnings.
It felt like a bargain. Solid balance sheet, defensive business model, generous dividends. The payout looked sustainable too. What could go wrong?
Today, the yield’s an eye-catching 8.7%, and while the price-to-earnings ratio’s crept up to 13.8, that still looks modest to me.
Yet the share price has floundered.
Stock’s falling
I’d expected Taylor Wimpey to rebound when interest rates fell, mortgage affordability improved and housing demand picked up. While waiting, I reinvested every dividend, confident the stock would eventually deliver.
And it did, briefly. At one point I was sitting on a 40% capital gain. Add the income, and I was feeling smug. That didn’t last. The stock’s now down 32% over 12 months and won’t stop. It’s plunged 12% in the last month. That’s in marked contrast to the FTSE 100, up 3.66% in the same period.
There are sector-wide problems. Inflation’s sticky at 3.6%, keeping interest rates high. That’s hit mortgage affordability, especially for first-time buyers. The government’s employer’s National Insurance hike and 6.7% Minimum Wage boost have pushed up labour costs. Materials aren’t cheap either.
On top of that, the Competition and Markets Authority recently investigated housebuilders over pricing and buyer incentives. Seven firms, including Taylor Wimpey, have agreed to pay £100m to support affordable housing schemes. Its share was £15.8m.
All of this has dented sentiment and profits.
Dividend income’s high
Still, Taylor Wimpey isn’t giving up. On 30 May, it said its spring selling season was “progressing well”. Sales per outlet edged up to 0.77 per week, from 0.74 a year earlier. Cancellation rates rose slightly to 16%, but the total order book held firm at £2.36bn.
Full-year profits are forecast at £444m. That’s solid. But margins are under pressure as costs rise buy prices slow.
The final dividend paid on 9 May was 4.66p per share. However, that was a tiny cut from last year’s 4.79p. It’s only the second cut in 13 years, and not too troubling given the yield remains so high. It hasn’t helped sentiment though.
The payout is guided by a clear policy: return around 7.5% of net assets annually, or at least £250m, even in tough markets. That suggests decent income potential, if it holds.
Room to grow?
Analysts think the share price could rally hard from here. The median 12-month forecast from 16 analysts is 143.7p. That’s a mighty 32% jump from current levels. Add in the income, and total returns could top 40%.
That’s optimistic, and I’m not banking on it. But of the 18 analysts tracking the stock, 12 say Buy and six say Hold. Nobody says Sell.
I’m down around 10%, but factoring in dividends, I’m actually ahead. There’s no way I’m selling, and others might want to consider buying at today’s price.
My big worry is that housebuilders have underperformed ever since Brexit. That’s nearly a decade now. I don’t think this is a value trap, but we never know. I remain optimistic.
