Image source: Getty Images
I buy Taylor Wimpey (LSE: TW) shared two chances last month and I’m really looking forward to getting the hat-trick, but I’m also a bit cautious. There are so many things that I like about FTSE 100 home builder, but there are also big risks.
Let’s start with the positive. I bought Taylor Wimpey because I like to invest in quality blue chip companies when their shares are out of favor and cheap as a result. Especially if the drop is not the company’s fault, as is the case here.
much to like
Taylor Wimpey is certainly cheap, trading at just 5.6 times earnings. It also comes with an ultra-high 9% yield, which I always find hard to resist.
While the group faces serious challenges, this is not due to poor management. Like the rest of the homebuilding sector, it is at the mercy of rising interest rates and distressing developments in the Middle East.
Brits are still desperate to buy houses and Taylor Wimpey can’t build them fast enough. In normal times, the imbalance between supply and demand would favor the producer, but these are not normal times.
Investors spent most of 2023 assuming interest rates would peak in the fall and fall next spring. As a result, the Taylor Wimpey share price is up 16.67% in a year. Optimism is now fading as the “higher for longer” interest rate mantra takes hold. Shares are down 14.38% in six months and 5.63% in the last week.
So far, house prices have only fallen by around 5%, although after inflation that is a fall in real terms of around 12%. This is hitting revenue, which plunged 21.2% in the first half of 2023. Pre-tax profit fell almost 29% to £237.7m.
I bought Taylor Wimpey on 1st September for 114p and again on 29th September for 124p. With the shares now trading at 104p, I’m down around 12% overall. Now I’m wondering if I should lower the average and buy more.
Hard times
Shares sold off last week on fears that the conflict between Israel and Hamas could spread. I have no idea what will happen in the Middle East. Nobody knows. The only thing I can do when buying stocks is look at the fundamentals of the company, and here Taylor Wimpey looks pretty solid.
In 2022, revenue rose 3.15% to £4.4bn and pre-tax profit rose 33.5% to £907.9m. The first half of 2023 was inevitably tougher, with revenue slumping 21.2% to £1.64bn and profits down 29% to £237.7m. That trend is likely to continue.
However, the management is proud of its “robust” balance sheet and Taylor Wimpey finished the first half with net cash of £654.9m, up from £642.4m a year earlier.
While I’m concerned about short-term share price volatility, my main concern is whether the dividend is safe. In an encouraging sign, management increased the interim payout from 4.62 pence per share to 4.79 pence in August. The forecast yield for 2023 looks stable at 8.9%, but dividend coverage is expected to be cut in half, going from exactly double earnings to just one. If the current unrest drags on, it could come under pressure.
I still find Taylor Wimpey shares hard to resist and plan to lower the average in the coming days. If it fails later, you’ll probably respond by buying even more.
