With a dividend of 8.1%, are Taylor Wimpey shares a buy?

With an impressive dividend of 8.1%, and increasing demand for new homes, are Taylor Wimpey shares now getting interesting?

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Taylor Wimpey (LSE:TW) is a leading homebuilder in the UK. The company has a long history of success, dating back to its founding in 1935. However, the shares have disappointed over the last five years, down about 30%. But with government coming under increasing pressure to supply more homes, is now a potential buying opportunity?

Why would I be interested?

The company is well-positioned to benefit from the strong demand for housing. The UK population is growing rapidly, and there is a well-known shortage of housing supply. This is driving up house prices, which is benefiting Taylor Wimpey’s bottom line.

Second, Taylor Wimpey is a highly efficient operator. The company has a low cost of sales, and it is able to generate strong cash flow. This allows it to return a significant amount of capital to shareholders in the form of dividends, now at a healthy 8.1% yield.

Third, investing in housing is a relatively low-risk sector. There will always be a market for the product. Taylor Wimpey has a strong balance sheet, and it has a good track record of managing its risks. This makes the company a relatively safe choice for investors who are looking for a reliable investment, despite some near-term turmoil.

What are the risks?

With the share price clearly in a downwards trend, there are some risks to investing in Taylor Wimpey shares. The major risk is that the housing market could cool. With the economy uncertain, people are less likely to make major decisions on home ownership. If house prices were to fall, Taylor Wimpey’s profits could decline. This may be informing expected earnings declines of 4% per year.

Taylor Wimpey is also likely to face significant competition from other homebuilders. However, it is a well-established brand with a strong track record, so it is well-positioned to compete with its rivals.

One issue that may be a concern is the high cash payout ratio of 106%, which indicates that dividend payments exceed the amount of free cash flow available. However, with debt levels as low as they are, the company could afford to take on further debt to manage the dividend payments if required for a short period.

How are the fundamentals?

Taylor Wimpey is a well-established homebuilder with a strong track record of profitability. The company has generated positive earnings for the past 10 years. Taylor Wimpey’s margin is also relatively high, at 15.4%. This indicates that the company is efficient in its operations and is able to generate substantial profit from its sales.

Taylor Wimpey also has a strong balance sheet. The company has strong cash reserves, low debt levels, and a debt-to-equity ratio that is reducing significantly. This indicates that Taylor Wimpey is financially sound and has the ability to take on debt to fund its growth if required.

The price-to-earnings (P/E) ratio of 7.4 times is slightly below the average of the housebuilding sector at 10.1 times. However, a discounted cash flow calculation suggests the shares may be 26% overvalued at present, with a calculated fair value of 93p.

Am I buying?

With uncertainty in the economy, and not a great deal of potential growth in Taylor Wimpey shares over the next few years, I believe my money is better spent elsewhere.

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.

Gordon Best 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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