Taylor Wimpey (LSE: TW) shares are up about 60% in the past year. Compare this to 30% return of the FTSE 100 index in the same period. The stock has outperformed by a wide margin to the broader index.
The homebuilder’s stocks are in focus as the UK exits lockdown in a phased manner. Another reason for me to look into these stocks is the government’s support to new home buyers. I would like to analyse this FTSE 100 stock further to understand to see if it’s a potential buy for my long-term portfolio.
Bullish reasons to buy Taylor Wimpey shares
Chancellor Rishi Sunak announced the new mortgage guarantee scheme during the budget. The scheme will encourage more first-time buyers to buy a new home for a minimum 5% deposit. This should help leading homebuilders like Taylor Wimpey. Due to the various challenges in the past few years and slow growth of wages, we did see lower interest in home buying. With more government support we could see renewed interest in this sector.
The company released its annual results recently. Revenue fell by 36% year-over-year to £2.8bn. The drop in revenue was primarily due to the lockdown. The company did see positive rebound in the second half of the year. The UK forward order book is strong at 10,685 homes as at 31 December 2020. Another important metric is that the average selling price increased to £288k when compared to £269k for the previous year.
Taylor Wimpey has a stable balance sheet, with net cash of £719.4m. The company has resumed its ordinary dividend policy, that is, 7.5% of net assets. It announced a final dividend of 4.14p. A decent dividend is another reason for me to like Taylor Wimpey shares.
The company made further land purchase last year at attractive prices during the Covid-19 pandemic. It has sufficient land bank to provide growth in the long term. Looking into the future, the management expects the 2021 operating profit margin to improve to 2019 levels. They also have a medium term operating profit margin target of 21 to 22%. Management is very confident to achieve this target. They also have an ambitious average return of capital employed target ratio of 34%.
Risks to consider
The company has to comply with various environmental regulations. People are increasingly putting pressure on the homebuilders on environment concerns when developing the land. This could add more cost to the company and might delay the company’s future projects.
The discretionary spending of some people has come down due to Covid-19. The job market might take a couple of years to improve and a lot of businesses have shut down in the last year. If the economic recovery takes a longer time than expected it could put a dent on the company’s long-term growth.
Final view on Taylor Wimpey shares
The low interest rate environment and government support should bode well for homebuilders. The company is fundamentally strong. However, the last year’s revenue drop is more than its competitors. So I would like to keep the company in the watch list and I am not a buyer of the stock today.
