This 5.8%-yielding FTSE housebuilder looks cheap to me right now!

After a tough period for the UK housing market, this big FTSE 100 builder looks in a good position to benefit from new initiatives.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bronze bull and bear figurines

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest £1,000 in Taylor Wimpey right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Taylor Wimpey made the list?

See the 6 stocks

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.

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.

Created with Highcharts 11.4.3Taylor Wimpey Plc PriceZoom1M3M6MYTD1Y5Y10YALL25 Sep 201925 Sep 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

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.

Should you buy Taylor Wimpey shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

Simon Watkins 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »