In my view, Taylor Wimpey (LSE: TW) shares are among the most exciting on the entire FTSE 100 right now. They’re dirt cheap, trading at just 6.01 times earnings, and yield a whopping 8.33%.
I rate them so highly that I bought some on Friday, 1 September, and I plan to buy more if the share price dips again.
While I like buying shares when they’re cheap, it’s often a sign of trouble and I don’t have to look too far to see what ails Taylor Wimpey. It’s a housebuilder and the UK property market is in dire straits.
Things could get worse
House prices have dropped by 4.6% in the year to August, according to Halifax. That’s the fastest drop since 2009 slashing £14,691 off the average house price, reducing it to £279,569.
Falling house prices mean Taylor Wimpey will get less money for its own new-builds. Worse, prices are almost certainly set to fall further.
This is now a buyer’s market, and Taylor Wimpey is a seller. While I don’t believe house prices will fall 20% or 25%, as some claim, we’re in a very different world to just a couple of years ago. Interest rates may not return to near-zero levels and Taylor Wimpey will have to adjust.
However, I do expect interest rates to peak shortly. Bank of England governor Andrew Bailey has just suggested we’re almost there. Five-year fixed-rate mortgages could soon drop below 5%, easing the pressure on owners and boosting buyers.
Taylor Wimpey recently posted a 21.2% drop in first-half revenues to £1.64bn and a 29% drop in profit before tax to £237.7m. Yet there are positives. It boasts a “robust” balance sheet and “excellent” landbank, while net cash actually climbed around £12m to £654.9m.
The board felt able to up its interim dividend from 4.62p per share to 4.79p. Analysts expect the stock to yield 8.36% in 2023 and 8.34% in 2024. Nice.
One thing does worry me though. Housebuilders have performed poorly ever since crashing in the aftermath of the Brexit vote in 2016. They’re a bellwether for the struggling UK economy.
Over the last 12 months, Taylor Wimpey’s shares are up a modest 4.54%. Yet over five years, they’ve fallen 32.8%. If I’d invested £5,000 in the stock five years ago, my original stake would have fallen to £3,360.
I’d have received a steady stream of dividends in that time, too. My £5k would have bought me 2,959 shares in September 2018. The dividend per share was 6.24p back then, which would have generated income of roughly £185 in year one.
Taylor Wimpey’s dividend has bobbed around a bit since but my crude sums suggest I’d have earned income of roughly £1,000 in that time, which I’d have reinvested to buy more stock. I’d still be down, with my stake worth around £4,350, but it softens the blow.
What really matters is what happens over the next five, 10, 15 or 20 years. I think Taylor Wimpey looks a good buy for long-term investors like me who plan to hold through thick and thin. Britain needs homes, and Taylor Wimpey will help build them. With luck, it will help me build my retirement savings too.