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Why I think the Taylor Wimpey share price could be the FTSE 100’s best

Taylor Wimpey (LSE: TW) shares dipped a couple of percent Wednesday morning after the UK’s biggest housebuilder released a full-year trading update.

Chief executive Pete Redfern told us the company is “on track to deliver full-year 2019 results in line with our expectations,” adding that despite the economic and political uncertainty, “housing market conditions have remained resilient.”

He went on to confirm that, thanks to the firm’s “very strong” cash generation and financial position, there’ll be approximately £610m handed to shareholders in total dividends for 2020.

No enthusiasm?

So why the wholly unenthusiastic reaction from the market? There’s apparently “some increasing customer caution, particularly in the higher-priced markets of London and the South East“, and profitability is perhaps declining a little as it seems achieving full-year expectations will have come about “with slightly higher volumes and slightly lower operating margins than” original guidance suggested. But I’m seeing no cause for bearishness in either of those.

And to counter any margin pressure, we heard that cost pressure is softening and the firm expects cost inflation to “reduce as we go into 2020.

The Taylor Wimpey share price has fallen 13% over the past two years, and we’re now looking at P/E multiples of only around eight. Dividends look set to yield 10.8% this year and 11% next, and the feared slump in the housebuilding business is stubbornly refusing to happen. I see Taylor Wimpey shares as one of the best buys on the FTSE 100 right now.

More of the same

There was a slightly more enthusiastic reaction to a Q3 update from Persimmon (LSE: PSN) a week ago, and the shares have since put on 7%. The Persimmon share price is still down around 5% over two years, but it’s now up 33% since a recent low in August 2019, though still some way below its summer 2018 peak.

Persimmon’s focus has been on improving build quality, customer service and customer retention, saying: “Central to this plan is putting customers before volume, with sales volumes in the first half of the year being 6% lower than last year.”

In general, Persimmon’s take on market conditions was bang in line with Taylor Wimpey’s, telling us of “the usual pick-up in customer activity as we moved into the autumn season.” Again, consumer confidence “has remained resilient despite the continued uncertainties,” and the firm pointed to a combination of high employment, some real wage growth, low interest rates and a “competitive but disciplined mortgage market” as being behind the strength.

Another buy?

Persimmon shares are on a slightly higher P/E valuation than Wimpey’s at around 8.8, and the expected dividend yields are slightly lower at 10%, but it’s all pretty much in line with the whole depressed sector.

Do I see Persimmon shares as a buy? Well, I hold some, and I’ve seen no reason to temper my long-term bullishness, especially not as my main focus these days is dividends.

On that score, though, investors do need to remember that today’s dividends from Persimmon and Taylor Wimpey do include special components as both companies are in the process of returning surplus capital. So we can’t expect 10%+ yields for ever, but I still see sufficient cash generation for strong ordinary dividends in the long term.

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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.