Down 25%, are Taylor Wimpey shares a ‘no-brainer’ buy now?

Rising interest rates are bad for house buyers, and they’re hitting the builders too. But I think Taylor Wimpey shares look cheap.

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Over the past 12 months, Taylor Wimpey (LSE: TW) shares have fallen 25%. They’d been recovering nicely as the pandemic eased, but then came soaring inflation, rising interest rates, war…

But the best time to buy shares in great companies is when they’re down, right? So is Taylor Wimpey a no-brainer buy today?

The FTSE 100 housebuilder has had plenty of surplus cash to return to shareholders. And, since March, it’s been hoovering up its own shares in a £150m share buyback programme. That has just been completed.

By 27 June, the company had bought up almost 117m of its own shares, at an average of 128p a pop. Investors today can pick them up for even less than that.

Buy even cheaper?

The shares do look tempting to me today, especially as the company was happy buying at higher prices. There are other reasons for buying back shares rather than paying special dividends, including tax issues, so I don’t want to be over-confident about that, though.

What else does this buyback mean? Other things being equal, it should mean higher dividend yields in the future. If the company returns the same amount of cash, it will be spread across fewer shares and so each one would get a little bit more.

Analysts are predicting a yield of over 8% for the current year, rising to 10% next year. Those are cracking yields. And surely it’s a no-brainer to lock in some annual income at that kind of level, isn’t it?

It might be, if we’re confident that those dividend levels will be sustainable. But a few things are conspiring against the housing market at the moment, especially in the short term.

Inflation hurts

High inflation means people have less money to put into moving house. And rising interest rates mean mortgage repayments will rise. Against that, the market has been benefiting from the pent-up demand left over from the pandemic, when many people’s buying plans were put on hold.

In its first quarter, Taylor Wimpey wasn’t seeing any let-up in demand. The company said: “The UK housing market remains healthy, underpinned by continued strong customer demand, low interest rates and good mortgage availability. The recent increase in interest rates, from 0.5% to 0.75%, has not impacted customer appetite and the mortgage market remains competitive, with good availability of low-cost fixed-rate mortgage products.

Hmm, low interest rates, eh? That 0.75% base rate has since risen to 1.25%. And we don’t yet have any indications of how that might affect demand. We’ll surely know more when we see first-half results. But they’re not due until 3 August.

Long-term buy?

So maybe buying Taylor Wimpey shares isn’t exactly a no-brainer decision. Not with the economic outlook so uncertain. But the company seems confident in its progressive dividend policy. And it does appear to be generating the cash needed to sustain it.

I can’t see long-term demand for housing tailing off in my lifetime. Despite the risks, I think investors could do well buying at today’s depressed Taylor Wimpey share price.

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.

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.

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