As the Taylor Wimpey share price gains on rising dividends, here’s why I’d buy

The Taylor Wimpey share price has fallen 25% over the past 12 months. First-half results make me believe the market has got it wrong.

| 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.

A couple celebrating moving in to a new home

Image source: Getty Images

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.

The FTSE 100 housebuilding sector sector has been shunned by investors in 2022. But after the Taylor Wimpey (LSE: TW) share price jumped 4% on the back of first-half results, I wonder if we might be in for a reversal.

There seems to be a key fear here. It’s all about rising interest rates, making mortgages more expensive. Inflation, edging close to 10%, has a direct effect too. If people are struggling to pay their bills, many will shelve their plans to move house.

But according to Nationwide’s latest update, average house prices in July rose 11% compared to a year ago. That’s up from a 10.7% rise in June. The average selling price has now exceeded £271,000. There are tentative signs of cooling, though.

No downturn here

Taylor Wimpey doesn’t appear to be seeing any downturn. Chief executive Jennie Daly reported “an excellent financial and operational performance with completions in the first half slightly ahead of expectations.”

Revenue did dip by 5.4% in the half. And there were some exceptional items that benefited the current period. Excluding exceptionals, pre-tax profit came in pretty much flat. And adjusted earnings per share dropped 3.2%.

The key figures for me are all about cash. Taylor Wimpey reached 3 July with £642m net cash. And that’s after having completed a £150m share buyback during the half.

Dividend rise

The board announced an interim dividend of 4.62p per share, nicely ahead of the 4.14p paid at the halfway point in 2021. That’s in line with a policy of “paying an annual ordinary dividend of c.7.5% of net assets.” And it will be “complemented by additional returns of surplus capital at the appropriate time.”

The company reckons full-year operating profit is “now expected to be around the top end of the current market consensus range.”

The main risk surely lies in the outcome of that. The housing market still looks strong for now. But I think it’s likely that interest rates will be lifted even higher as inflations keeps on climbing. And that won’t help.

Cost pressures

Even if house prices should fall, that doesn’t necessarily mean builders’ profits will decline. When it happens, land prices usually decline too. Profits will be dependent on the difference between the two, on changing materials prices, and on a number of other costs.

Taylor Wimpey spoke of “prevailing build cost inflation around 9-10%.” The company said that was “fully offset by house price growth.” But how long that will last is anybody’s guess. So it’s not as simple as profits being tied to house prices, but the threat is there.

Where will the Taylor Wimpey share price go over the rest of the year? I can’t help feeling it might be a battle between house prices and inflation, and whichever starts to decline first.

Bags of cash

The bottom line for me is that Taylor Wimpey is strongly cash generative. It has healthy net cash, rather than carrying net debt like so many others right now.

That, in my book, makes it the kind of company that should be resistant to tough economic conditions. And it makes Taylor Wimpey a buy for me.

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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

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

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »