I’ve owned shares in Britain’s housebuilders for several years now, and I remain convinced that that they still have what it takes to make share investors an absolute fortune.
Take Taylor Wimpey (LSE: TW), one of the core holdings in my shares portfolio. Trading conditions are more difficult than they have been for many, many years, a combination of a drying-up buy-to-let sector following recent government action, and a broader erosion in buyer confidence since the 2016 EU referendum, putting paid to the explosive house price rises of recent years.
In recent months investors have also been minded to sell the stock on the back of Bank of England interest rate rises. Indeed, as chatter has grown over the possibility of repeated rate hikes by Threadneedle Street, Taylor Wimpey’s share price has fallen 16% since mid-May.
And further weakness could be just around the corner. Along with raising the benchmark rate to 0.75% last week, the highest since 2009, Bank of England chief Mark Carney repeated the institution’s guidance that further “gradual” increases can be expected.
Trading remains strong
Clearly this is bad news for many home hunters looking to buy somewhere to live. But it is worth remembering that borrowing rates for homeowners remain around historical lows, and Carney’s suggestion that interest rates around 2.5% will prove to be the “new normal” means that recent rises are unlikely to prove the precursor to the hulking benchmark levels of yesteryear.
I actualy see recent share price weakness at Taylor Wimpey as a great buying opportunity. Government inaction to get Britain building means that homes demand is likely to keep on overshooting supply, with the favourable lending climate keeping sales across the new-build segment ticking steadily higher as well.
Against this backcloth, City analysts are expecting earnings at Taylor Wimpey to rise by 3% in both 2018 and 2019. And latest trading details from the FTSE 100 builder give these forecasts plenty of credibility.
While total completions (excluding joint ventures) fell to 6,497 homes during January-June from 6,648 homes a year earlier, an increase in the private average selling price to £295,000 from £287,000 helped pre-tax profits increase 47% to £301m.
Meanwhile, an order book of 9,241 homes as of the start of July — up from 8,741 homes a year earlier — showed that demand at Taylor Wimpey remains robust.
That 10% yield!
This bright outlook, allied with its staggering cash flows (net cash rose by almost a quarter year-on-year during the first half, to £525.1m), means that Taylor Wimpey is expected to pay monster dividends of 15.2p and 17.3p per share in 2018 and 2019 respectively. Consequently, investors can enjoy yields of 8.9% and 10.1% for these years.
As if this wasn’t enough reason to pay serious attention, value investors will be cheered by news that the business sports a forward P/E ratio of just 8.2 times.
Of course, Taylor Wimpey isn’t without its risks as homebuyer appetite wanes on the back of the Brexit effect and on the impact of Bank of England action further down the line. Still, in my opinion these potential hazards are more than baked into the company’s share price at present levels, comfortably inside the bargain territory of 10 times or below. I think the housebuilder is one of the Footsie’s hottest dividend buys right now.
