The FTSE 100 is absolutely jam-packed with riddles and conundrums that I just can’t get my head around, but one of the biggest things that befuddles me is quite why the country’s homebuilders trade on such low valuations.
Look, I’m not blind to the political and economic uncertainty created by Brexit, the atomic elephant in the room that threatens to deliver a hammer blow to the domestic housing market. Indeed, the Bank of England famously predicted that property prices could collapse by more than a third within three years of the UK leaving the European Union with no deal.
I have long argued, though, that the chances of the country leaving without a deal are remote, a belief that has been reinforced by fresh wranglings in Westminster in the run-up to next week’s planned meaningful vote on Brexit. And therefore the rock-bottom valuations of some of the biggest listed construction stocks is hard to justify.
More strong trading news
Take Taylor Wimpey (LSE: TW), for example, a share which I myself own and which has long changed hands on a forward P/E ratio well below the broadly-accepted bargain benchmark of 10 times or below.
Such a low rating flies in the face of the small chance of a Brexit-related shock to the homes market, not to mention the steady flow of positive trading updates that Taylor Wimpey (and its peers) have continued to furnish the market with.
However, share price movement on Wednesday suggests that things could be about to change, the housebuilder’s latest trading statement resulting in a whopping 7% share price surge and pushing the business to six-week highs.
In that statement Taylor Wimpey advised that “whilst it is clearly too early to give a definitive view on 2019 trading, we continue to see solid forward sales indicators and start the year with a very strong order book.” In particular the business paid tribute to the encouraging employment trends, as well as the “wide range of mortgage products at competitive interest rates” and the impact of the government’s Help To Buy scheme, in stimulating demand.
The London company saw the number of completions up 3% in 2018, it advised, to 14,947 units. And its order book as of the close of December stood at £1.8bn, up from £1.6bn the year before and representing 8,304 homes versus 7,136 homes in 2017.
Those 12%+ yields
Now City brokers had been predicting a 1% earnings fall at Taylor Wimpey in 2019, followed by a modest 2% rebound next year. These numbers, though, could be on course for big upgrades in the wake of today’s release. And the likelihood of further positive re-ratings further down the line, helped by that aforementioned cheap prospective earnings multiple that still sits at just 7.1 times despite today’s movements, means that more share price gains could well be in order as we move through 2019.
I myself loaded up on the housebuilder because of its colossal dividend yields, and as I type, these stand at a staggering 12% and 12.3% for 2019 and 2020 respectively. Today’s update has reinforced my belief that the business can keep delivering great profits and dividend growth, and I reckon it’s one of the best-value Footsie stocks to snap up today.
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Royston Wild owns shares of Taylor Wimpey. 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.