In these difficult times, I’m glad I’ve got some income stocks in my portfolio. But there’s always room for more.
According to the Adam Smith Institute, today is Tax Freedom Day. This is the theoretical date on which the average earner will have paid their taxes for the year. For the remaining 196 days of 2023, everything earned is ours to spend as we choose.
I wonder if I should use my financial freedom to buy another income stock. One that’s recently caught my eye is Taylor Wimpey (LSE:TW.).
Tough times
In common with all housebuilders, its stock price has crashed over the past couple of years. Rising interest rates have badly affected the sector.
But a 52% fall since their all-time high in February 2020 means the shares are now yielding 8.5%. This assumes last year’s dividend of 9.4p per share will be repeated in 2023.
However, a high yield like this might suggest that the present level of payout is unsustainable, and therefore likely to be cut. But if this was the case, I think it would’ve been announced by now.
Persimmon, another UK housebuilder, revealed a 75% reduction in its dividend in March.
Since then, Taylor Wimpey has released its own trading update. This would have been the time to make a similar announcement. But it was silent on the subject. I think this implies that the dividend will be unchanged in 2023.
Setting expectations
The company is expecting house completions to be 9,000-10,500 this year (2022: 14,154). The average forecast of the analysts covering the stock is 9,943. They’re expecting operating profit to be £442m, compared to 2022’s actual result of £923m.
Based on the current number of shares in issue, a dividend of 9.4p will cost £332m. This means the company would be returning 75% of its forecast profit.
Although on the high side, I think this is achievable. The company only has £88m of borrowings, which means it doesn’t have to use much of its operating cash to service its debt. Indeed, Persimmon — which has no debt — usually returns nearly all its profits to shareholders.
But there’s little point buying a stock to generate a healthy passive income if its share price is going to continue falling.
Over the past five years, Taylor Wimpey’s shares have sunk by 39%.
Further headwinds
I’m nervous that mortgage approvals are still lagging behind previous levels. Also, the Bank of England seems certain to raise interest rates again.
This could put further pressure on Taylor Wimpey’s stock price.
But I think we’re at (or close to) the bottom of the cycle and and the company’s shares are unlikely to fall much more. Inflation looks to have peaked and the OECD has revised upwards its forecast of UK economic growth.
Bellway, another builder, reported on 13 June that it had seen a “sustained improvement in sales demand through the spring selling season“. I think the green shoots of a recovery are starting to appear in the fortunes of builders of new houses.
But even though it’s Tax Freedom Day, I don’t have sufficient disposable income to buy Taylor Wimpey shares right now. Ironically, if I didn’t own a property with a variable rate mortgage, my personal circumstances would be different. I’d then be able to have the stock in my portfolio!
