Better property stock buy: Persimmon vs Taylor Wimpey

Today, the long-term investing case for two property stocks is put forward by a couple of our Foolish contributors.

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According to many brokers, older landlords are selling their buy-to-let investments at a clip. And, as Foolish (capital F!) investors will know, one alternative to having exposure to this market is through owning property stocks.

So we asked two Fools to name their favourite shares in the sector right now, and why. As ever, note that returns are not guaranteed and past performance is not a reliable indicator of future results.

Persimmon poised for future growth

By Alan Oscroft. Right now, I think it’s hard to choose between any of the UK’s top housebuilders, including those in the FTSE 100 and the FTSE 250.

But if I have to choose one, it’s Persimmon (LSE:PSN), the one I bought myself.

It’s been slower to respond to the latest uptick in sector share prices. While others — like Taylor Wimpey (LSE:TW) — have been gaining since late 2022, Persimmon remains stubbornly down.

Persimmon shares, in fact, have lost more than 50% in the past five years.

I suspect some of that is due to expectations of a dividend cut. Some sources still show forecasts of 12-13%, but we know that’s not going to be repeated this year.

And that really just echoes the firm’s past returns of surplus cash through special dividends. Based on ordinary dividends, forecasts suggest a yield of around 5.5% this year. And that’s fine.

Investors might also be put off by Persimmon’s £350m provision for claims relating to building safety remediation. That’s mainly about the crisis over sub-standard cladding.

The sector clearly faces risk when property prices are falling on slowing demand. And there are still big uncertainties over how Persimmon’s 2023 cash flow situation will look.

But earnings growth predicted for the next few years makes me think Persimmon might be the best of the bunch.

With a bit of luck, inflation should start to drop in the next few months. And when interest rates start to fall, I could see the whole sector getting an uprating.

Alan Oscroft has positions in Persimmon

Taylor Wimpey: tough as bricks

By John Choong. Investors have been ditching housebuilder stocks due to their expected decline in profits and dividend yield over the next couple of quarters. This is because lower profits are being projected due to cost-of-living crisis affecting mortgage affordability, thus affecting dividend payouts. Nonetheless, I believe Taylor Wimpey shares are the best of the bunch for a couple of reasons.

The first would be the fact that, unlike its peers, Taylor Wimpey’s dividends are asset-based and not earnings-based. This means that any short-term downturn in profits isn’t going to affect payouts tremendously (like Persimmon, for example). The High Wycombe-developer has assured shareholders that it always aims to return 7.5% of net assets annually, which equates to at least £250m per year.

And while it’s more likely than not that house prices will face some further weakness in the months to come, it’s worth noting that the company is also much more resilient than many of its other peers. That’s due to the fact the builder’s customers’ average LTV ratio sits at approximately 75%, showing the strong affordability by its more affluent customer base. As such, this should better shield it from the headwinds of the housing market.

Pair these factors with its strong balance sheet boasting a debt-to-equity ratio of merely 2%, and decently valued multiples, and it’s easy to see why Taylor Wimpey shares are my preferred investment in the sector.

MetricsTaylor WimpeyIndustry Average
P/B value1.00.9
P/S ratio1.00.8
FP/S ratio1.31.1
P/E ratio6.711.2
FP/E ratio13.511.8
Data source: Taylor Wimpey

John Choong has positions in Taylor Wimpey.

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.

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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