As the Taylor Wimpey (TW) share price falls, I see a buying opportunity

Stock markets are in panic, and Taylor Wimpey (LON: TW) shares are down. But buying when everyone is selling can reap rewards.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Taylor Wimpey (LSE: TW) released 2019 results Wednesday, and the share price promptly lost nearly 5% of its value. Is the much-feared collapse in housebuilder stocks finally upon us?

Well, no, I really don’t think so.

House prices were flat during 2019, and investors in anything related to property don’t like to see that. It does surprise me, though, that that a lot of people seem to think housebuilders need rising house prices to make money. They don’t.

But it is perhaps a sign of weakening demand, and we also have another year of lingering uncertainty over Brexit. A drop in demand could indeed harm Taylor Wimpey’s profits.

Completions up

The company reported a 5% increase in completions over the year, to 16,042 homes (from 15,275 in 2018). That led to a 6.4% rise in revenue to £4,341.3m. But build costs have been increasing, resulting in a 3.4% fall in operating profit to £850.5m.

Net cash is down, from £644.1m a year ago to £545.7m, but that’s still a very healthy position to be in. Just think of all the FTSE 100 companies that are carrying huge net debt, but whose share prices are valued up with, and beyond, Taylor Wimpey’s.

As for any possibility of falling demand, it doesn’t seem to be showing up yet. At 31 December, Taylor Wimpey had a forward order book of 9,725 units, worth a total of £2,176m. A year previously we were looking at 8,304 units valued at £1,782m, so there’s a clear improvement there.

Pressures

Looking forward, it seems unlikely that current pressures on housebuilders will abate. It looks like house prices will remain subdued during the year, while Taylor Wimpey says it expects build cost inflation in 2020 to come in around 3%.

So, while demand for new homes seems robust, I reckon we’ll most likely see a similar outcome in 2020. That’s another increase in completions and revenue, but further pressure on operating profit. The firm does say it’s “focused on reducing underlying costs to mitigate future build cost inflation,” so that will probably help a little.

Saying all that, I really don’t see a short period of rising build costs as any real problem when I look at the big picture. If there’s any sustained flat or even downward trend in house prices, that would surely feed through to lower prices for building land. There would be a lag, of possibly a few years, between the cause and the effect.

Shortage

But we’re still facing a big housing shortage in the UK, with recent analysis suggesting a shortfall of between one and 1.2 million homes. That surely means a profitable long-term future for housebuilding firms and their shareholders.

Coming back to the 2019 results, rather than focusing on the short-term downsides, my attention is more drawn to Taylor Wimpey’s dividends. The company handed over £599.7m in total dividends in 2019 (up from £499.5m in 2018), and proposes to pay a further £610m for 2020.

I say forget Brexit, look beyond 2020, and keep taking the cash.

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 assessed. Consider taking independent financial advice.

Alan Oscroft 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

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »