Taylor Wimpey shares in a sweet spot

Shares were flying even before a massive election boost. Our head of markets discusses what's next. 

The housebuilding sector is in a sweet spot at present, more recently fuelled by the removal of a layer of political uncertainty, and Taylor Wimpey (LSE:TW.)has certainly felt the benefit.

Quite apart from the wider assistance provided by historically low interest rates, mortgage availability and an ongoing supply shortage, the Help to Buy scheme is another fillip to profits. 

The UK housing market showed signs of stability throughout 2019, despite the political and economic headwinds, while Taylor Wimpey had previously left itself much to do in the second half of the year to get back on track. This appears to have been achieved, with a record order book of around £2.2 billion representing an increase year-on-year of 22%. 

The reduction of 4.5% in build cost inflation was another tailwind, while the operating profit margin of 19.6% is perfectly adequate, even though it has dipped from a previous 21.6%.

Source: TradingView Past performance is not a guide to future performance

The positive news does not end there, however. The company’s cash generation will result in a return to shareholders in dividends of £610 million, up from £600 million, and with special dividends the projected yield is in excess of 9%, a clear and obvious invitation to income-seekers. 

Meanwhile, the net cash balance is £546 million, which, despite being around £100 million light of the previous number, is nonetheless a formidable buffer. Taylor Wimpey’s long landbank also offers solace, with the current figure stable at 76,000 plots and the strategic pipeline at 140,000 potential plots.

Naturally, there are concerns which will need to be closely monitored. At the higher end of the housing market, there has been some pressure, particularly in London and the South East to which Taylor Wimpey is exposed. 

In 2020, the company’s performance will likely be second-half weighted, while there may be some headwinds developing as negotiations with Europe develop over the year. Further out, the removal of the Help to Buy scheme will undoubtedly punch a large hole in profits, and the sector as a whole will need to take action to replace that income.

For the moment, though, those are distant clouds on the horizon with the sector showing few signs of slowing down. Taylor Wimpey has ridden the wave, with the shares rising 29% over the last year – and 23% in the last three months alone – which compares to a hike of 11.1% for the wider FTSE 100 index. 

Against this backdrop, appetite for the stock remains undiminished, with the market consensus coming in at a strong buy.