I think one of the best stocks to buy now is FTSE 100 homebuilder Taylor Wimpey (LSE: TW).
While I think it is unlikely this company will achieve the sort of returns I may get from a high-growth tech stock, I believe it has many desirable qualities as an income investment.
I think the company will also benefit from the current state of the UK housing market. That market has been structurally undersupplied for many years, and builders just cannot keep up. As well as the lack of supply, government initiatives such as the help to buy scheme and ultra-low interest rates have pushed up demand.
The lack of supply and increase in demand has only pushed property prices in one direction, and that is up.
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This combination of tailwinds may not last forever. The Bank of England could begin to increase interest rates if inflation starts to take off. This would almost certainly impact demand for mortgages.
Higher house prices may also encourage homebuilders to increase output. This additional supply could weigh on prices if buyers have more options.
Still, despite these risks, I continue to believe that Taylor is one of the best stocks to buy now in the FTSE 100. The company’s size gives it a competitive advantage, as it can negotiate lower fees from suppliers. It can also negotiate better deals on land and buy bigger plots, which increases economies of scale. The more properties a homebuilder can put on a plot, the lower the cost of each unit.
These advantages should enable the business to navigate any challenges it may encounter going forward.
Another reason why I think this is one of the best shares to buy now is Taylor’s balance sheet. Many construction companies run into problems because of the way the construction industry operates. Builders have to spend money upfront on land and materials but do not get paid until the property is sold. In the meantime, they also have to pay employees. This places a considerable amount of stress on builders’ balance sheets. They need a lot of liquidity to remain solvent until they are paid.
After nearly collapsing in the financial crisis, Taylor’s management has adopted a conservative balance sheet strategy ever since. At the end of 2020, the company had net cash of £719m. That was after spending £1.3bn of cash on land acquisitions throughout the year.
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These numbers suggest to me that the company is well funded, financially strong, and is benefiting from the tailwinds outlined above. The strong balance sheet also gives management flexibility to return additional capital to investors. City analysts have pencilled in a dividend yield of 5% for the company in 2021.
Overall, despite the company’s challenges, I believe Taylor is one of the best stocks to buy now. As such, I would buy the FTSE 100 stock for my portfolio today.
