As the Taylor Wimpey share price gains on rising dividends, here’s why I’d buy

A couple celebrating moving in to a new home

The FTSE 100 housebuilding sector sector has been shunned by investors in 2022. But after the Taylor Wimpey (LSE: TW) share price jumped 4% on the back of first-half results, I wonder if we might be in for a reversal.

There seems to be a key fear here. It’s all about rising interest rates, making mortgages more expensive. Inflation, edging close to 10%, has a direct effect too. If people are struggling to pay their bills, many will shelve their plans to move house.

But according to Nationwide’s latest update, average house prices in July rose 11% compared to a year ago. That’s up from a 10.7% rise in June. The average selling price has now exceeded £271,000. There are tentative signs of cooling, though.

No downturn here

Taylor Wimpey doesn’t appear to be seeing any downturn. Chief executive Jennie Daly reported “an excellent financial and operational performance with completions in the first half slightly ahead of expectations.”

Revenue did dip by 5.4% in the half. And there were some exceptional items that benefited the current period. Excluding exceptionals, pre-tax profit came in pretty much flat. And adjusted earnings per share dropped 3.2%.

The key figures for me are all about cash. Taylor Wimpey reached 3 July with £642m net cash. And that’s after having completed a £150m share buyback during the half.

Dividend rise

The board announced an interim dividend of 4.62p per share, nicely ahead of the 4.14p paid at the halfway point in 2021. That’s in line with a policy of “paying an annual ordinary dividend of c.7.5% of net assets.” And it will be “complemented by additional returns of surplus capital at the appropriate time.”

The company reckons full-year operating profit is “now expected to be around the top end of the current market consensus range.”

The main risk surely lies in the outcome of that. The housing market still looks strong for now. But I think it’s likely that interest rates will be lifted even higher as inflations keeps on climbing. And that won’t help.

Cost pressures

Even if house prices should fall, that doesn’t necessarily mean builders’ profits will decline. When it happens, land prices usually decline too. Profits will be dependent on the difference between the two, on changing materials prices, and on a number of other costs.

Taylor Wimpey spoke of “prevailing build cost inflation around 9-10%.” The company said that was “fully offset by house price growth.” But how long that will last is anybody’s guess. So it’s not as simple as profits being tied to house prices, but the threat is there.

Where will the Taylor Wimpey share price go over the rest of the year? I can’t help feeling it might be a battle between house prices and inflation, and whichever starts to decline first.

Bags of cash

The bottom line for me is that Taylor Wimpey is strongly cash generative. It has healthy net cash, rather than carrying net debt like so many others right now.

That, in my book, makes it the kind of company that should be resistant to tough economic conditions. And it makes Taylor Wimpey a buy for me.

The post As the Taylor Wimpey share price gains on rising dividends, here’s why I’d buy appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.