Among a flurry of trading updates from the housebuilders this week, today it’s the turn of Taylor Wimpey (LSE: TW.) to report. What’s becoming abundantly clear is that housing activity is drastically slowing. With its share price already down 25% in a year, is it a steal or a value trap?
A tale of two halves
Overall, the business performed well in 2022. House completions were broadly in line with the prior year, standing at 14,154. Average selling price on private completions increased 6% to 352,000. As a result, it’s expected to report full-year operating profit in line with expectations.
In its half-year results back in August, management said that “the housing market has been and continues to be very resilient”. However, that bullish stance had gone by November. A meltdown in the UK gilt market, had a knock-on effect on borrowing costs, which forced banks to raise mortgage rates.
We’re now starting to see evidence of the consequences of such rapid rate rises. For the second half of the year, cancellation rates stood at 23%. The net private reservation rate slumped 44% to 0.48 homes per outlet per week.
Recession fears
For me, investing in housebuilders is predicated on one’s belief of how deep and long an expected recession is likely to be. It’s also heavily influenced by the state of the US economy. As the old saying goes: when America sneezes, the world catches a cold.
At the beginning of 2022, analysts were predicting that GDP growth in the US would be about 4%. But we’ll be lucky if turns out to have been 1%. This year, growth is predicted to be about 0.5%. But in other words, the world’s largest economy should avoid a recession.
I believe the magnitude of the slowdown will surprise analysts this year. The housing market in the US has, for all intents and purposes, frozen. Just as in the UK, rapid rises in interest rates have both led to an affordability squeeze and dented buyers’ confidence.
Both the Federal Reserve and the Bank of England are on a mission to save their reputations. They know that they were slow to the party in dealing with inflation. In my opinion, they are therefore willing to accept pain in the economy in order to restore their credibility.
Enticing dividend
Taylor Wimpey’s forward dividend yield stands at a juicy 8%. That’s over twice the average of the FTSE 100.
It’s a well-capitalised business, with net cash of £864m. This is slightly higher than at the close of last year. That’s largely as a result of reduced land spend in the second half.
It has also begun consulting on a series of “proposed changes” which, if they go ahead, would be expected to generate annualised savings of around £20m.
Taken together, this suggests to me that management is expecting the road ahead to be bumpy and is beginning to batten down the hatches. With so many indicators out there suggesting that the UK has already entered a recession, I’m not willing to invest in a business that would likely be at the eye of any storm.
