Taylor Wimpey: A Quality House Builder With A 7% Yield

26th Jul '22 by Roland Head

7 comments 1897 reads

Most of the big, listed UK housebuilders are trading at levels 30%-40% below their pre-pandemic peaks. It seems that more cautious valuations are being applied to these business, despite robust profits, strong balance sheets and fat order books.

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As a consequence of this slump, there are some attractive dividend yields on offer at the moment. My subject today, Taylor Wimpey (LON: TW), currently boasts a 2022 forecast dividend yield of 7.8%.

One possibility is that this is a classic cyclical trap. The shares look cheap because profits are near a cyclical high – and are about to fall.

The other option is simply that this sector does offer value at the moment. Stockopedia’s algorithms appear to agree. Taylor Wimpey currently boasts a StockRank of 94 and a Super Stock style.

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As safe as houses?

It’s hard to invest in housebuilders without taking a broader view on the housing market. Rather than trying to make predictions, myself, I’ll share with you some recent house price data from Nationwide and Rightmove.

Both organisations’ most recent house price reports appear to confirm that house price growth is slowing, but still strong. Nationwide reported annualised growth of 10.7% in June. Rightmove is predicting 7% for 2022.

Both agree that demand remains strong and is being constrained by limited supply.

Although Rightmove says that first-time buyers’ average mortgage payments have risen by 20% so far this year, data from Nationwide suggests that affordability for this key group is was only slightly worse than the long-run average in Q2:

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First-time-buyer mortgage payments as a % of take-home pay. (Source: Nationwide House Price Index)

Property bears predicting a major UK housing crash might also want to consider this chart from Nationwide. It shows that UK house prices have only fallen in a handful of the last 70 years:

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Annual UK house price growth, 1953-2021 (Source: Nationwide House Price Index)

Are we heading for one of these periodic slumps? I don’t know. But I’d note that current house price inflation has not reached the rampant levels that have come before previous slowdowns.

My guess would be that a period of stagnation is more likely. That might not be too much of a…

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flashing blade

26th Jul '22

thank you for useful analysis and certainly food for thought. As a longer term investor it is useful to see such analysis in the mid to higher cap region purely so I can build up a balanced portfolio . Personally from a subscriber point of view an analysis in the higher caps certainly balances the excellent work Paul provides in the below £700 m cap stocks.

aflash

Using a different data base which combines Dividend Yield, Dividend Safety and Dividend Growth into one proprietary indicator YSG (the last column) we get:

I make no predictions.

On the anecdotal side I bought BWY (Bellway) and PSN (Persimmon) just before their recent x-div date but got stopped out of both by their subsequent drop in price.

I buy DHI (D R Horton) in the US regularly because the American housebuilders score better.

It is the same story there. After a downtrend from December they are turning up.

Rusty2

A lot depends if there is a recession and how how long it will last. You only have to look back to around 2009 to see how badly housebuilders were affected. I know in my area all of the housebuilding was stopped for about 18 months. Most housebuilders nearly went bankrupt.

House prices in my area are struggling this year, last year houses were selling very quickly, this year many are taking months to sell, often needing large price reductions. Maybe there has been a reversal of the trend of moving out of the cities?

I do hold Redrow (LON:RDW) and Henry Boot (LON:BOOT), considering selling RDW as I think things will get worse but the dividend is quite attractive.

Bouden54

I see Harworth (LON:HWG) as a lower risk way to get exposure to residential land, without the direct exposure to house prices and build costs. They typically develop the land, gain planning permission and then sell plots on to housebuilders. It's got a good track record and on a nice discount to book value too.

Ed66

Great analysis Roland. Thanks.

I’ve become more interested in house builders throughout the year as their valuations have improved. (I currently hold Redrow (LON:RDW), Persimmon (LON:PSN) and my new favourite of the bunch Taylor Wimpey (LON:TW.))

These companies all have huge land banks and, taking a longer-term view, I can’t help feeling that as an island nation, with a growing population, there is ultimately only one way that the value of land can go.

This has benefited these companies in the past and I am sure that it will continue to do so.

Keep up the good work.

Lucky dip

27th Jul '22

Time will tell but the housebuilders shares as a sector are bargains at these prices.

Never underestimate the love of Brits with their properties.

I have lost more with not buying the property and their shares than losing .

Barratts was 130 p during financial crisis and later I brought under 100 p.
the fear gauge is getting there this time round again.

I have most housebuilders and have been adding more so am a bit biased.

Some companies are for the benefit of executives and some for shareholders too. BKG falls into second category.

I like all of them. Vistry and GLE are my current favourite but I have shedloads of others too!

Bronstein

The other factor weighing down sentiment in this sector is the cost that builders will incur for the cladding scandal. An article on BDEV in this week's IC concludes "Barret's underlying business seems strong but, with so many unanswered questions about fire safety, its hard to recommend this stock - at least until its results or the housing department provide more clarity." Same argument applies here. If you want to jump in, check what provision has been made and do some research on likely exposure.
Roland - Personally, as a holder of Redrow and Bellway, I'd be interested to understand why you TW. for preference? Of the many factors to consider here the one that identified my picks was the long standing track record on growth in shareholder funds (TNAV per share + div).

Taylor Wimpey: a quality house builder with a 7% yield

As safe as houses?

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Roland Head

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