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The FTSE 100 has been on a tear this year, up an impressive 11% year to date. Big-name winners have powered the index, and few have shone brighter than Rolls-Royce, which has become the UK’s biggest aerospace success story.
Not every sector has joined the party, though. Housebuilders have been lagging well behind, weighed down by economic uncertainty and higher interest rates. Barratt Redrow and Persimmon have both taken heavy hits over the past 12 months, with share prices down over 30%.
But the hardest fall has come from Taylor Wimpey (LSE: TW.), whose shares are down 18% so far this year alone. Today, the stock trades at a rather tempting £1 a share. And here’s where it gets interesting: city analysts expect the price to rebound 35% over the next 12 months. By comparison, the average forecast for Rolls-Royce is just 10% upside.
Could this unloved housebuilder be hiding an opportunity?
Taking a closer look
Taylor Wimpey is one of the UK’s largest residential developers, building homes across England, Scotland, and Wales. It’s a long-established name in the FTSE 100 but recent challenges have hit it hard.
In July, management cut its profit forecast after unexpected fire-safety remediation costs ate into margins. The news didn’t go down well with the market — and earlier this month Barclays downgraded the stock to Underweight.
Yet, there seems to be some promising developments in the housing market. July saw the largest monthly house price increase so far this year, with analysts noting that “prices continue to edge up, suggesting demand remains ahead of supply”.
If that trend holds, developers like Taylor Wimpey could be well placed to benefit.
Financially, the picture is mixed. The net margin is a slim 2.4% and return on equity (ROE) stands at just 1.97%. Revenue is up 4.2% year on year but earnings growth has declined a hefty 65%.
Fortunately, the balance sheet is sound, with enough debt coverage to keep lenders comfortable.
Valuation is also appealing. The forward price-to-earnings (P/E) ratio sits at 12, while the price-to-book (P/B) ratio is just 0.85 — both indicators that the stock is trading below what the market might consider fair value.
One of the housebuilder’s strongest attractions is its dividend. The yield currently sits at a juicy 9.4%, supported by 14 consecutive years of payouts. That said, dividend cover is weak, meaning a prolonged profit slump could see management forced to trim it.
Meanwhile, other risks remain. The housing market recovery is slow, and if inflation stays stubbornly high, mortgage rates will remain elevated. If so, demand for new homes could take another knock, hurting profits.
The takeaway
At £1 a share, Taylor Wimpey offers a compelling mix of value and income potential. If analysts’ forecasts prove right and the housing market continues to recover, the shares could comfortably outpace Rolls-Royce over the next year.
For an income-focused portfolio, the near-double-digit yield is hard to ignore. That’s why I hold the stock and think it’s worth considering — bearing in mind that another market downturn could come when least expected.
