Is the Taylor Wimpey share price & 11% yield a bargain or should I buy this FTSE 250 dividend stock?

Roland Head checks on progress at housebuilder Taylor Wimpey plc (LON:TW) and reviews a FTSE 250 (INDEXFTSE:UKX) recovery play.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

One pound coin

Image source: Getty Images.

Housebuilding stocks have become known for their high dividend yields. But I estimate that FTSE 100 firm Taylor Wimpey (LSE: TW) may have the highest forecast dividend yield of any stock in the FTSE 350.

In a trading statement today, the builder confirmed plans to return £600m to shareholders via dividends in 2019. My sums indicate that this equates to a payout of 18p per share. At the last-seen share price of 160p, that would give a dividend yield of 11.3%.

What’s going on?

Taylor Wimpey’s share price has fallen by around 20% so far this year, as the market has continued to price in lower profits for housebuilders.

The problem is that so far, there’s no evidence profits are falling. Today’s statement is a good example. Chief executive Pete Redfern says that political uncertainty is dampening sales in the south east, but that overall sales rates for the group have remained unchanged during the second half of the year. The firm’s current order book is for 9,783 homes, 12% higher than at the same point in 2017.

Although build costs are expected to rise by 3%-4% in 2018, this is in line previous estimates. The outlook for profits in 2018 is also unchanged. Based on broker consensus forecasts, this suggests that adjusted earnings should rise by about 5% in 2018.

Buy, sell or hold?

Mr Redfern struck a cautious note on 2019 today, suggesting that sales will be flat next year. However, to my mind, the real question is whether housebuilders can handle the planned tapering of the Help to Buy scheme, which is now due to end in 2023.

My view is that if the economy remains stable after Brexit, housebuilders could continue to trade well for a little longer yet. Many are shifting their focus to more affordable homes and towards the rental market, while developing lower-cost building methods.

Although Taylor Wimpey shares certainly aren’t without risk, I suspect there could be some value available at current levels.

Another possible choice

I’m limiting my exposure to housebuilders to a small part of my portfolio. If you’re taking a similarly cautious approach, you may want to consider another unloved high-yield stock.

Gaming software specialist Playtech (LSE: PTEC) has fallen by about 45% this year after warning on profits. So there was welcome news for shareholders this week, when the firm said that expectations for the full year remain unchanged from August.

Despite this reassurance, investors haven’t been rushing to buy the shares. Playtech’s share price remains at levels not seen since 2013.

One reason for this caution may be that the company’s exposure to the Asian market remains a worry. Revenue forecasts for Asia were cut in the summer. And although management now says that Asian revenue has “stabilised” at about €150m per year, it’s not yet clear to me how this will affect the firm’s profitability.

A speculative buy?

Broker forecasts put Playtech on a 2018 forecast P/E of 9.1 with a dividend yield of 6.8%.

Earnings are expected to rise by 17% in 2019, giving a prospective P/E of 7.7 and a yield of 7.6% for next year.

This business has historically generated strong levels of free cash flow, providing good cover for its dividend. If this record can be maintained then I think the shares could be a recovery buy at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

1 dividend stock with a juicy yield to boost returns!

This Fool likes the look of this dividend stock to boost his passive income stream and explains why he would…

Read more »

Happy male couple looking at a laptop screen together
Investing Articles

Here’s 1 growth stock primed for long-term growth and returns!

Jabran Khan is hunting for a growth stock to boost his holdings. Could this financial advisory business be the right…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 FTSE 250 shares I bought for extra dividends

I plundered the FTSE 250 index to find these three cheap stocks with ailing share prices. All three firms pay…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m buying cheap FTSE 100 stocks to boost my passive income!

Buying dividend stocks today could considerably improve the amount of passive income I make. Here are some FTSE 100 stocks…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Am I crazy for buying Royal Mail shares?

Royal Mail shares have collapsed by almost half in 2022. And with group profits falling and strike action under way,…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

2 recession-resistant stocks to buy right now

After the pandemic slump, we're now facing a UK recession. Many are looking for recession-resistant stocks to protect their money.

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

This FTSE 100 stock continues to fall! Should I buy shares?

This Fool takes a closer look at a FTSE 100 quality assurance stock. As the shares continue to fall, is…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Is the Rolls-Royce share price about to surge?

The Rolls-Royce share price continues to fall as market patience wears thin. But could it be on the brink of…

Read more »