Shares in UK housebuilder Taylor Wimpey (LSE: TW) have taken a big hit in 2022. Year to date, the share price is down more than 30%.
After that fall, the FTSE 100 stock now looks cheap. At present, the company’s forward-looking price-to-earnings (P/E) ratio is just six. Should I buy Taylor Wimpey shares for my portfolio then? Let’s take a look.
Taylor Wimpey could face challenges in 2022
While Taylor Wimpey shares do look cheap, I’m not convinced now is a good time to buy. One thing that concerns me here is rising interest rates. These, combined with the general cost-of-living crisis across Britain, could potentially have an impact on housing affordability. As a result, we could see lower demand for properties in the short term.
It’s worth noting that a recent UK housebuilding survey showed residential construction activity in May was very weak. Within the S&P Global/CIPS construction purchasing managers’ index, the housebuilding component fell to 50.7 in May from 53.8 a month earlier (a reading below 50 represents a contraction). This was the worst performance from the industry for years.
“Affordability concerns will be weighing on the mind of potential house buyers grappling with escalating costs for everyday items, resulting in a postponement of big purchases until the UK economy shows more resilience,” said Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply.
This is concerning, in my view. The data suggests Taylor Wimpey’s profits could be about to take a hit.
Could Taylor Wimpey cut its dividend again?
Another thing that concerns me is the possibility of a dividend cut. Housebuilders are notorious for cutting their dividends when economic conditions are challenging. And we’ve seen this before with Taylor Wimpey.
During the 2008/2009 Global Financial Crisis, it cut its payout completely and didn’t resume dividends for several years (even then the payments were tiny). More recently, it cut its dividend payout during the early days of Covid-19.
Given that economic conditions in the UK are deteriorating, and that many experts believe we could have a recession in the next few years, I think there’s a reasonable chance of a dividend cut here in the not-too-distant future.
If Taylor Wimpey was to cut its payout, it may see its share price tank on the news, resulting in a double blow for shareholders.
Should I buy?
Now it’s worth pointing out that in April, Taylor Wimpey said that trading was in line with its expectations and that it was experiencing strong levels of customer interest. It added it was confident of delivering enhanced shareholder returns. And in May, the group reconfirmed its guidance for the year. So it doesn’t seem to have been impacted by rising interest rates or the cost-of-living crisis quite yet.
However, investing is all about anticipating what’s going to happen. And, to my mind, the near term could be turbulent for Taylor Wimpey and the other UK housebuilders.
As a result, I’m going to leave Taylor Wimpey on my watchlist for now. I think there are safer stocks I could buy today.
