Taylor Wimpey (LSE: TW) released 2019 results Wednesday, and the share price promptly lost nearly 5% of its value. Is the much-feared collapse in housebuilder stocks finally upon us?
Well, no, I really don’t think so.
House prices were flat during 2019, and investors in anything related to property don’t like to see that. It does surprise me, though, that that a lot of people seem to think housebuilders need rising house prices to make money. They don’t.
But it is perhaps a sign of weakening demand, and we also have another year of lingering uncertainty over Brexit. A drop in demand could indeed harm Taylor Wimpey’s profits.
Completions up
The company reported a 5% increase in completions over the year, to 16,042 homes (from 15,275 in 2018). That led to a 6.4% rise in revenue to £4,341.3m. But build costs have been increasing, resulting in a 3.4% fall in operating profit to £850.5m.
Net cash is down, from £644.1m a year ago to £545.7m, but that’s still a very healthy position to be in. Just think of all the FTSE 100 companies that are carrying huge net debt, but whose share prices are valued up with, and beyond, Taylor Wimpey’s.
As for any possibility of falling demand, it doesn’t seem to be showing up yet. At 31 December, Taylor Wimpey had a forward order book of 9,725 units, worth a total of £2,176m. A year previously we were looking at 8,304 units valued at £1,782m, so there’s a clear improvement there.
Pressures
Looking forward, it seems unlikely that current pressures on housebuilders will abate. It looks like house prices will remain subdued during the year, while Taylor Wimpey says it expects build cost inflation in 2020 to come in around 3%.
So, while demand for new homes seems robust, I reckon we’ll most likely see a similar outcome in 2020. That’s another increase in completions and revenue, but further pressure on operating profit. The firm does say it’s “focused on reducing underlying costs to mitigate future build cost inflation,” so that will probably help a little.
Saying all that, I really don’t see a short period of rising build costs as any real problem when I look at the big picture. If there’s any sustained flat or even downward trend in house prices, that would surely feed through to lower prices for building land. There would be a lag, of possibly a few years, between the cause and the effect.
Shortage
But we’re still facing a big housing shortage in the UK, with recent analysis suggesting a shortfall of between one and 1.2 million homes. That surely means a profitable long-term future for housebuilding firms and their shareholders.
Coming back to the 2019 results, rather than focusing on the short-term downsides, my attention is more drawn to Taylor Wimpey’s dividends. The company handed over £599.7m in total dividends in 2019 (up from £499.5m in 2018), and proposes to pay a further £610m for 2020.
I say forget Brexit, look beyond 2020, and keep taking the cash.
