Fellow Motley Fool writer Peter Stephens had made Taylor Wimpey his top share for May, pointing to a low P/E multiple and a high dividend yield. At today’s share price, that’s a forward P/E of only 8.5, while the expected dividend yield has climbed to more than 10%.
To me, a low valuation says one of two things. Either the shares are seriously undervalued, or we’re looking at a company that’s in trouble and set for a slowdown — and I just don’t see the latter as a possibility at all.
Bags of cash
Speaking of the dividend, Taylor Wimpey paid out a total of £499.5m in dividends in 2018, and and at the time of its full-year results at the end of February, said it will up that to around £600m in 2019. The company signalled its “intention to make further material cash returns in 2020 and beyond.”
It’s still early days in 2019, but in a Q1 update in April, chief executive Pete Redfern said that “in spite of wider macroeconomic uncertainty, the housing market has remained stable.” The company is enjoying a “record sales rate” and its forward order book for the year was described as solid, though Mr Redfern did admit to some “increased build cost pressures.”
It’s always seemed extremely unlikely to me that the UK’s withdrawal from the EU would have any long-lasting impact on the housing market, not when the charity Shelter is estimating a need for 1.2 million homes for young families trapped in “expensive and insecure private renting.”
It seems the market is finally catching up with rationality as Taylor Wimpey shares have climbed 34% since the start of the year.
I also think I’m seeing further evidence of strengthening market sentiment in Persimmon (LSE: PSN), which revealed its Q1 story on 1 May. It has faced criticism over its customer service, in particular with quoted moving-in dates not always being entirely accurate.
The company says it is continuing with steps to put that right, but even that issue doesn’t seem to have damaged its prospects.
Persimmon confirmed Taylor Wimpey’s market take, saying: “Since the start of the year, the new-build housing market has proved resilient with high levels of employment and low interest rates continuing to support consumer confidence.”
Persimmon’s average forward selling price has ticked up to approximately £237,850, from £236,500 in 2018. The firm’s partnership with housing associations also provides some order book stability.
On the dividend front, Persimmon continues with its three-year capital return plan of 125p per share per year. The second payment was made as an interim dividend in March, and there’s a final dividend of 110p to be paid in July.
The Persimmon share price hasn’t shown as strong a start to the year as Taylor Wimpey’s, having slipped back a little since February. But I’m happy enough with a 14% rise, and I’m expecting more in 2019 with the shares on a forward P/E of only 7.5.
Alan Oscroft owns shares of Persimmon. 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.