Some of the best stocks to consider buying are often languishing towards the bottom of share price performance league tables. But one person’s trash is often another’s treasure. Could this apply to Taylor Wimpey (LSE:TW.), whose shares are now changing hands for 26% less than they were in February 2021? I think so. Here’s why I believe the stock could be a bit of a bargain.
Then and now
Five years ago (February 2021), England was emerging from its last pandemic lockdown and Taylor Wimpey was about to publish its results for the year ended 31 December 2020 (FY20). These revealed completions (including joint ventures) of 9,609, a reduction of 6,110 (39%) on FY19, a reminder of how Covid-19 severely impacted UK housebuilding. But the pain continued with soaring inflation and rising interest rates.
However, I can now see some green shoots of a recovery. In FY25, year-on-year completions rose 6% to 11,229. And it was able to increase its average selling price (ASP) by 5% to £335,000.
If this trend can continue then I’m sure the group’s share price will respond positively. But I suspect most investors are attracted to the sector for the generous dividends. And this is where Taylor Wimpey’s far ahead of its rivals. Based on amounts paid over the past 12 months, it’s presently yielding 8.7%. This is over 2.5 times the yield on the FTSE 250.
Buyer beware?
But I’m not naive. I know that a high yield could be a value trap. However, in this case, I don’t think it is. Even when the group’s share price was at its peak in January 2020, the stock was still yielding 6.8%. Over several decades as a listed business, it’s established a reputation for paying above-average dividends.
| Year | Share price (pence) | Dividend (pence) | Yield (%) |
|---|---|---|---|
| 2020 | 165.8 | 4.14 | 2.5 |
| 2021 | 175.5 | 8.58 | 4.9 |
| 2022 | 101.7 | 9.40 | 9.3 |
| 2023 | 147.1 | 9.58 | 6.5 |
| 2024 | 122.1 | 9.46 | 7.8 |
| 2025 | 107.5 | 9.06 (forecast) | 8.4 |
And with mortgage approvals ticking up and interest rates expected to fall further, it can only be good for the group’s earnings and, therefore, its dividend.
Of course, there are still some threats to the recovery. Interest rates might not fall as anticipated and the UK economy remains shaky. Squeezed incomes and falling consumer confidence could adversely affect completions.
But the long-term fundamentals of the housing market appear solid. The country’s still not building enough houses to meet demand and the desire of young people to get on the housing ladder remains as strong as ever.
Final thought
However, patience is required. Over the past six months, Taylor Wimpey’s share price has remained broadly flat whereas, for example, Persimmon’s has increased by 24%.
I suspect this is because Persimmon has a lower ASP, which means its sales are likely to grow more quickly in a recovering market. But given that they operate in the same industry, I see no reason why Taylor Wimpey’s shares shouldn’t follow suit. Like its rival, it has a strong balance sheet and lots of land on which to build.
Therefore, I don’t think the 8.7% yield will be around for long. Now could be a good time to consider the stock.
