When the times are good, housebuilders can be very lucrative income shares. Look at Taylor Wimpey (LSE: TW) as an example. The Taylor Wimpey dividend yield is 8.8%.
Then again, the company did cut its interim dividend this year from 4.80p per share to 4.67p.
If that 3% cut was applied to the full-year dividend, it would imply a total dividend per share for the year of around 9.2p. That would still make for a dividend yield of 8.7%.
At a time when the FTSE 250 index overall (of which Taylor Wimpey is a member) has a 3.5% dividend yield, that strikes me as very attractive.
An inconsistent track record
The question in my mind, though, is how strong is the Taylor Wimpey business and what does that mean for its dividend prospects?
Housebuilders, after all, are notorious for being strongly tied to the property market cycle. When houses are selling like hot cakes, they can generate large amounts of cash and pay it to shareholders as dividends.
But when things slow down, housebuilders can see profits slump, with capital tied up in land banks and unsold properties. That is rarely good news for dividends.
In fact, Taylor Wimpey’s dividend last year was already slightly smaller than the prior year’s.
Looking further back, a good reference point is 2008. In that challenging year for the British and global economy, Taylor Wimpey reported a loss of £1.8bn. As the annual report put it back then, “the Board did not feel it appropriate to propose an interim dividend as a result of the deterioration in market conditions” and the final dividend was axed too.
To some, 2008 may seem a long time ago. But it is a useful reminder of how fragile the property market can be at times — and what that means for dividends.
Where do things go from here?
Taylor Wimpey lists ordinary dividends as only its third capital allocation priority, after maintaining a strong balance sheet and investing in ongoing work and its land bank.
It aims to pay out as an ordinary dividend 7.5% of net assets or at least £250m annually throughout the cycle.
That ‘throughout the cycle’ part of the policy is important, by the way. It basically means Taylor Wimpey can smooth out bad years with good, so that in any one year its expenditure on dividends may not necessarily match that target.
On top of that, who is to say how long ‘the cycle’ is?
If the property market does well and Taylor Wimpey keeps generating enough surplus cash, I think it could maintain or even grow its dividend.
It grew revenue 9% year on year in the first half. But its profit before tax and exceptional items fell by more than a fifth. Net cash was over two-fifths lower than at the same point last year.
Amid ongoing uncertainty about the strength of the economy, I think the outlook for the property market is difficult to ascertain with confidence. For now, despite its mammoth dividend yield, I will not be adding Taylor Wimpey to my portfolio.
