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Builder taylor wimpey (LSE: TW) announced this month that it will increase its annual dividend by 9.6%. That brings it to 9.4 pence per share, which at the current share price equates to a yield of 8.3%. That certainly catches my eye, but is Taylor Wimpey’s dividend forecast so attractive?
dividend volatility
Homebuilders often have quite volatile dividends.
When the housing market is doing well, they can generate a lot of free cash flow. Some can be used to buy land, but beyond that there are often limited uses for the cash within the business, so it is paid out as dividends. When home prices plummet or sales volumes drop (those two things often go together), dividends can be slashed or canceled altogether.
Before the pandemic, for example, Taylor Wimpey’s annual dividend was 16.9 pence per share. But in 2020 it cut its pay and raised funds by issuing new shares, diluting existing shareholders.
It was a similar story during the 2008 financial crisis. The share price had plunged more than 85% in a year and the company tried, but failed, to raise £500m in a rights issue. The annual dividend of 15.8 pence was removed. In other words, even after this month’s generous increase, the dividend is around 40% lower than it was in 2007.
Taylor Wimpey Dividend Forecast
But while it may have severely cut its dividend earlier, that doesn’t necessarily indicate what the next few years will hold for the company’s shareholders.
Basic earnings per share of 18.1 pence last year amply cover the dividend. Even if earnings are flat instead of rising, Taylor Wimpey’s dividend could continue to grow substantially for years to come.
The company generated positive free cash flow of £29m, after paying £324m in dividends and spending £151m on share buybacks. That’s sustainable if earnings stay at their current level. Even if they fall, it is possible for the dividend to be maintained or increased, by stopping share buybacks.
What about Taylor Wimpey’s dividend forecast? The stated objective of the company is “provide an attractive and reliable income stream for our shareholders, throughout the cycle, even during a normal recession, through an ordinary cash dividend”. Try to pay 7.5% of net assets or at least £250m a year over the entire business cycle. You figure you can do this if home prices drop less than 20% and sales volumes drop less than 30%.
In practice, I have my doubts about whether the company would pay the same dividend if things got this bad, or whether it would seek to preserve cash instead. For now, though the company says that, “the weaker economic context continues to affect near-term prospects“, remains optimistic about sales prospects. If the housing market doesn’t worsen dramatically, I expect Taylor Wimpey’s dividend this year to be at the same level or higher than last year.
However, that depends on the health of the housing market. In the longer term that is difficult to assess. A sharp drop in selling prices could mean a dividend cut. For now, I have no plans to buy the shares.
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