Taylor Wimpey’s (LSE: TW) share price has slumped 33% from its 20 September 12-month traded high of £1.69.
I think this has been driven almost entirely by two factors. The first was the dismal state of the housing sector for much of the past five years. This began with the spread of Covid from the beginning of 2020, which paralysed housing demand.
The invasion of Ukraine by major oil and gas supplier Russia pushed energy prices sky-high, fuelling inflation. This caused interest rates to surge and mortgage rates to hit 16-year highs. The resultant cost-of-living crisis added to the housing sector’s troubles.
Some optimism returned to the market as a new Labour government promised to build 1.5m new homes over five years. The first cut in the UK base rate since March 2020 occurred on 1 August 2024, further bolstering such hopes.
However, as quickly as it came, so it went, with October’s Budget widely said to be potentially inflationary and growth damaging.
How does the company look now?
Taylor Wimpey’s 2024 results released on 27 February showed a 32.4% year-on-year drop in profit before tax to £320.3m. This was way below analysts’ projections of £400.8m.
Revenue was also down by 3.2%, to £3.401bn and basic earnings per share fell 37.4% to 6.2p.
As a result of these numbers, the firm reduced its dividend by 1.3% to 9.46p. However, based on the current £1.13 share price this still gives an ultra-high-yield of 8.4%. By contrast, the average yield for its host stock index – the FTSE 100 — is just 3.5%.
Looking ahead, the firm expects to increase 2025 volumes to 10,400-10,800 homes. Consequently, it forecasts operating profit this year to be in line with analysts’ consensus of £444m.
I think a key risk here is that inflation continues to rise, pushing interest rates back up over time. This could deter people from buying new homes. Another risk is that the government fails to build the homes it has promised, as have so many previous governments.
How does the share valuation appear?
Consensus analyst forecasts are now that Taylor Wimpey’s earnings will increase by 17% a year to the end of 2027. It is exactly this growth that powers a firm’s share price and dividend higher.
Given this, together with other analysts’ figures and my own, a discounted cash flow analysis shows Taylor Wimpey shares are 39% undervalued.
Therefore, the fair value of the stock is £1.87, although it could go lower or higher than this.
Will I buy the shares?
I focus nowadays on stocks that yield 7%+ as I aim to live off dividends while reducing my workload. Taylor Wimpey certainly fits the bill here.
I also want these shares to be significantly undervalued, and the builder fits that bill too.
Crucially though, I also need to feel positive about the prospects for the sector in which a firm operates. But I do not feel positive about the UK housing sector.
I have seen a succession of governments fail to hit their housing targets, and I think this one may fail too. I also believe there is every chance that the cost of living will keep rising, which will deter home buyers. So, I will not buy this stock right now.
