I think Taylor Wimpey (LSE:TW.) is an excellent income stock.
Others might offer a higher yield, but the builder has increased its interim dividend, despite the well documented problems affecting the housing market. This resilience is one of the reasons why I believe it’s the best 6%-yielder on the Footsie.
Current outlook
In 2023, the company is expecting to sell around 10,500 homes. That’s approximately 25% fewer than its 2018-2022 average of 13,914.
Although disappointing, it’s still higher than the 9,799 properties it completed in 2020, when the pandemic wreaked havoc on the UK economy.
The Bank of England has increased interest rates 14 times since December 2021, prompting the current downturn in the new homes market.
Even so, in August 2023, the company announced a 3.7% increase in its interim dividend, to 4.79p a share. If its final payout is hiked by the same amount, it will return 9.75p to shareholders in respect of its 2023 financial year. This implies a current yield of 6.8%.
The company’s policy is to pay at least 7.5% of its net assets to shareholders each year, presently around £250m. Based on the current number of shares in issue, that’s a minimum of 7p a share. At this level, the stock’s still yielding 4.9% — over 50% more than the FTSE 100 average.
Financial stability
The company’s impressive shareholder return stems from its strong balance sheet, overseen by a conservative management team. At the end of October 2023, it had 140k of potential plots on which to build.
And it has very few borrowings. At 2 July 2023, its only debt was €100m of loan notes that are due to mature in 2030. To put this in perspective, its net assets are over 50 times higher.
The housebuilder expects to make an operating profit of £440m-£470m in 2023. That would be an impressive result given the doom and gloom surrounding the sector.
Also, at 5 November 2023, its order book was £1.9bn (7,042 homes), which suggests a large part of next year’s revenue is already secured.
And should the housing market pick up — as history suggests it will — the directors have promised to pay “additional surplus cash returns … at appropriate times in the cycle“. It last paid a special dividend of 10.7p in July 2019.
Cautious optimism
But dividends are never guaranteed, particularly for companies exposed to the highly cyclical housing market. It might take several years before the sector recaptures former glories.
Due to the cost-of-living crisis, first-time buyers — who make up a large proportion of the company’s customers — are finding it harder to save the necessary deposit to buy a property.
But the company is financially strong and profitable. Interest rates appear to have peaked and inflation is falling. Also, the UK economy is forecast to grow again in 2024. And with an election looming, politicians may soon promise to introduce further incentives to help boost the housing market.
I’m therefore confident that Taylor Wimpey will remain an excellent income stock for some time to come. If I didn’t already own shares in another UK housebuilder, I’d be happy to have the stock in my portfolio. But as much as I like the company, I don’t want to have too much exposure to one sector.
