If I’d bought Taylor Wimpey shares three months ago, here’s what I’d have now

Taylor Wimpey shares have struggled lately as interest rates and inflation stay high. Harvey Jones hoped for better when he bought them.

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I bought Taylor Wimpey (LSE: TW) shares on several occasions last year, because they looked too cheap to resist. They were trading at around six times earnings, while yielding 6% or 7%. That’s exactly the profile of FTSE 100 stock I like.

Buying shares when they’re out of favour and nicely priced as a result reduces risk. Yes, they can always fall further, but I felt relatively safe because most of the bad news about the housebuilding sector was already priced in.

A big juicy dividend is always tempting, as long as it’s sustainable. I felt that Taylor Wimpey’s was, despite rising mortgage rates and falling house sales. Although these things are never guaranteed.

Bargain FTSE 100 stock

Another reason I bought Taylor Wimpey is that I had no exposure to housebuilders. That wasn’t a problem when the sector was doing badly, but I felt that events were ready to swing back in their favour. This is a cyclical industry, and I wanted to buy at the bottom.

Last autumn looked like a good time, because I thought we had passed peak inflation and interest rates would start falling in 2024.

When that happened, buyers would be lured back into the market by cheaper finance and the feelgood factor returned — remember that? Unfortunately, that’s the bit I got wrong.

Markets were anticipating up to six interest rate cuts across 2024, starting in March. That rosy scenario has been derailed by today’s stubbornly high inflation. Taylor Wimpey was also hit by the rainy winter, which held up construction.

On 28 February, the board announced that it would build fewer homes this year as 2023 profits crashed 42.8% to £473.8m due to higher mortgage rates and weaker demand. Completions also slumped, from 14,154 to 10,848.

Strong dividend prospects

The Taylor Wimpey share price is up 14.02% over 12 months. However, it’s down 6.56% over the last three (despite jumping 3.34% on 12 April). If I’d invested £10k then, I’d have £9,344 today, a loss of £656.

That’s hardly the end of the world. The success of any stock should be measured over years, not months. The Taylor Wimpey recovery may have been delayed, but I still expect it to happen. Inflation is expected to fall below 2% in May, which will increase pressure on the Bank of England to cut interest rates. The stock will rise in anticipation.

As well as boosting sales, this will also cut build cost inflation. It’s already fallen from 8.5% to 1% on new tenders.

Taylor Wimpey’s shares aren’t as cheap as they were, trailing at 13.16 times trailing earnings. The forecast is still high at 6.9%, but cover is thin at just 0.9. I wouldn’t call it an unmissable buy today. But I got in at a good price and I’m happy to hold for long-term income and growth. 

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.

Harvey Jones has positions in Taylor Wimpey Plc. 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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