High yielder Taylor Wimpey positive on profits and the dividend

As has been the case for many months now, the housebuilding sector is being punished for what might happen rather than how it is doing now. Our head of markets runs through what looks like another set of strong numbers.

The yawning gap between trading performance and share price performance continues, with Taylor Wimpey (LSE:TW.) being the latest to highlight this disconnect with a strong showing.

The company has reported strong demand for the year, with current and future trading following the same trend. There are few signs of house price growth slowing, underpinned by a national housing shortage, interest rates at historically low levels and widespread mortgage availability. Indeed, the group has highlighted that house price growth has fully offset build cost inflation, which is currently running between 9% and 10%. 

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However, the sector has been under pressure following the removal of the stamp duty holiday and a revamped Help to Buy scheme, with overarching concerns emanating from the general outlook for the UK economy. Stretched government finances leave little room for tax reductions, adding to the inflationary pressure of food and energy prices that threaten to worsen the cost of living crisis which is being increasingly experienced by households.

In addition, housebuilders have been hit by the cost of remediation on legacy housing, for which Taylor Wimpey has set aside an additional provision of £80 million.

For the moment, the general caution has yet to filter through to the housebuilding sector in terms of actual trading, and Taylor Wimpey is no exception. The company has reported half-year pre-tax profit which is comfortably ahead of expectations, and up by 16.3% on the previous year. Group completions are ahead of guidance, the average selling price on those completions is ahead by 3.1% and the value of the order book has increased from £2.6 billion to £2.8 billion.

At the same time, operating profit margin for the six months ended 3 July has risen to 20.4% from 19.3% and remains well in sight of the 21% to 22% target. The group was 89% forward sold for the year for this reporting period and has guided that full-year operating profit will be at the top end of the current consensus range.

Demand remains healthy in terms of reservations and viewings, with the pipeline of further completions on track despite some pressure arising from bottlenecks in the planning system, while the land grab for new opportunities remains a competitive space.

The company’s general progress comes against strong comparatives from the previous year, where the carry-over of completions after the release of lockdown restrictions flattered some of those earlier numbers. The balance sheet also remains in good health, enabling a £150 million share buyback programme to be completed over the period, and also an increase to the dividend which leaves the projected yield on the stock at a punchy 7.5%.

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Trading is strong and the outlook upbeat, as evidenced by the market consensus of the shares which remains resolutely positive, coming in at a 'strong buy'. Share price performances have far from reflected this optimism across the sector as a whole, however.

Despite the initially positive reaction to the numbers today, Taylor Wimpey shares have declined by 28% over the last year, as compared to a gain of 4.3% for the wider FTSE100 index, underlining that caution rather than hope remains the watchword for this beleaguered sector at present.