Like all housebuilders in the UK, the FTSE 100’s Taylor Wimpey (LSE: TW) has seen lean times in recent years. High mortgage rates combined with a cost-of-living crisis worsened the already grim housing market caused by Covid.
However, 1 August saw the Bank of England cut interest rates for the first time in four and a half years, to 5%. The bank’s governor added on 19 September that he is optimistic that “interest rates are going to come down”.
The government’s pledge to build 300,000 new homes yearly for five years is also positive for the housing market’s outlook. If this target is met, it should mark a turning point in the fortunes of the UK’s major housebuilders.
Business outlook
Taylor Wimpey’s H1 2024 results reflected both the bearish reality of the previous six months and some bullishness ahead.
Operating profit dropped 22.6% to £182.3m. This partly reflected another £88m added to the cost of fire-safety-related cladding due to inflation.
Nevertheless, CEO Jennie Daly highlighted that mortgage availability remains good, and the firm is well positioned for growth from 2025.
She expects full-year completions to be towards the upper end of the previous guidance range of 9,500-10,000. This would also reduce the cost per unit built, which should boost the firm’s underlying operating margin from H1’s 12%.
A risk here is that interest rates rise again, preventing any near-term falls in mortgage rates. Another’s government slippage in meeting its housebuilding targets.
However, analysts forecast that the firm’s earnings will grow 17.2% a year to end-2026.
Are the shares cheap?
Taylor Wimpey’s share price has already begun to bounce back from its 12-month 23 October traded low of £1.65. However, at £1.65 it’s still 30% lower than when Covid began to surge in the UK in February/March 2020.
To ascertain whether it’s currently cheap, I looked at the key price-to-book ratio (P/B). It currently trades at a P/B of 1.3 compared to a peer group average of 1.4. So it’s cheap on this basis.
A discounted cash flow analysis shows the stock’s 24% undervalued on its current £1.65 price. This implies a fair value for the shares of £2.17.
The bonus of a high yield
In 2023, Taylor Wimpey paid a total dividend of 9.58p, which yields a very healthy 5.8%. By comparison, the present average FTSE 100 yield is 3.6% and the FTSE 250’s is 3.3%.
So, £10,000 invested in the stock with the dividends compounded would generate an additional £7,835 after 10 years. After 30 years on the same average yield, it would have made another £46,735.
Analysts forecast that the dividend will rise to 9.62p in 2025 and 9.76p in 2026, giving respective yields of 5.8% and 5.9%.
Will I buy the shares?
I focus now on very-high-yield shares (over 7%), so this stock is not for me at present.
However, if I were casting a broader investment net, then its undervaluation and good yield would appeal to me.
That said, I would not buy it without first seeing proof of the government’s new housebuilding commitment in action.
