Taylor Wimpey (LSE:TW) shares are set to leave the FTSE 100 this month. After falling 18% since the start of the year, it’s set to be replaced by UK stock market newcomer Metlen Energy & Metals.
As the stock drops into the FTSE 250, I expect some selling from funds that look to track the FTSE 100. I don’t normally take notice of this, but this time I do actually quite like the stock…
FTSE 100 vs FTSE 250
The official date for reassessing the composition of the FTSE 100 is after the market close tomorrow (2 September). An official announcement is due the following day.
Assuming Taylor Wimpey does in fact leave the FTSE 100, funds that aim to track the index should sell their holdings in the stock. And funds that look to track the FTSE 250 should buy it.
There’s no judgement involved in this – passive funds shouldn’t look to outperform the index by buying or selling ahead of time. They should look to match it by being exactly in line with changes.
According to estimates, there’s around four times as much capital in FTSE 100 funds compared to FTSE 250 ones. So the stock moving from one to the other should result in more selling than buying.
Despite this, I’m not sure the rebalancing itself is an obvious opportunity. Active investors – who decide what to buy and when – should be in a position to anticipate the change when it comes.
As a result, I’m not looking to use Taylor Wimpey falling out of the FTSE 100 as a potential buying opportunity. But I do think the stock looks interesting on other grounds.
Short-term challenges
It’s been a tough 12 months for Taylor Wimpey. The firm has been hit with cost inflation weighing on margins and higher provisions for fire safety remediation.
As a result, the company posted a pre-tax loss of £92m during the first half of the year. And profits for the full year are set to come in at around £424m – below the previous guidance of £444m.
Despite the issues, the dividend has been largely maintained. That’s because Taylor Wimpey returns cash to its shareholders based on its assets rather than its cash flows.
Rising costs are an ongoing issue. But if the firm achieves its anticipated £424m in operating profits, the current share price implies a price-to-earnings (P/E) ratio of less than 10.
Given this is based on earnings that are being hit by (what should be) a number of one-off costs, I don’t think this looks expensive. And the dividend yield is almost 10%.
Regardless of what happens with index reshuffling, I think the stock looks like good value. And the dividend yield makes it interesting from a passive income perspective.
Focusing on what matters
I think investors should at least take a look at Taylor Wimpey shares. But that’s not because index funds selling as the stock falls out of the FTSE 100 is likely to generate a buying opportunity.
When it comes to long-term investing, what matters most is the underlying business. And while the firm has been dealing with some challenges recently, there’s a lot to like from that perspective.
