An 8.4% yield and down 33%, is Taylor Wimpey’s share price seriously cheap now?
Taylor Wimpey’s (LSE: TW) share price has dropped 33% from its 20 September 12-month traded high of £1.69.
I believe this reflects market uncertainty over the UK’s housing sector rather than anything to do with the firm. After years in the doldrums for the sector, it’s difficult for investors to feel confident about its prospects again, I think.
Demand for homes was crippled during the Covid period and then kept in check by soaring interest rates. Subsequently, spiralling energy prices after key supplier Russia invaded Ukraine caused the cost of living to surge.
The UK’s housing market cycle
That said, the last year or so has seen more positive factors begin to emerge.
The Bank of England cut interest rates from 5.25% last August for the first time since March 2020. Three more reductions have brought the benchmark base rate down to 4.25%.
At the same time, the UK government’s pushing ahead with plans to build 1.5m homes within its five-year term.
Another boost came on 11 June when Chancellor Rachel Reeves announced another £10bn to be spent on new houses.
How does the business look?
The firm’s 2024 results reflected both the previous housing sector malaise and the more positive outlook. The full-year number released on 25 March showed a 32.4% year-on-year drop in profit before tax to £320.3m. This undershot analysts’ projections of £400.8m.
However, the results also contained a forecast increase in 2025 volumes to 10,400-10,800 homes. Based on this, the firm projected operating profit this year of £444m (in line with analysts’ consensus).
This forecast was reiterated in its trading update on 30 April. It added that for the year to 27 April its total order book value was £2.335bn against 2024’s £2.093bn.
A risk here is any further and sustained surge in the cost of living. This could deter people from buying new homes.
However, analysts forecast the firm’s earnings will increase by 16.6% each year to end-2027.
Is the share price undervalued?
I ran a discounted cash flow (DCF) analysis to cut to the chase on Taylor Wimpey’s valuation. This uses cash flow forecasts for any firm’s underlying business to identify where its share price should be.
Using other analysts’ numbers and my own, the DCF for the firm shows it’s 58% undervalued at £1.13. Therefore, their fair value is £2.69.
Given this, they look very cheap to me.
What about the dividend yield?
The firm paid a dividend in 2024 of 9.46p, giving a yield of 8.4% on the current £1.13 share price. Analysts forecast that the yield will remain above 8% a year until the end of 2027, at a minimum.
So investors considering a holding of £11,000 (the average UK savings) in the firm would make £14,406 in dividends after 10 years. After 30 years on an average 8.4% yield, this would rise to £124,520.
Adding in the initial £11,000 investment and the holding would be worth £135,520. This would generate a dividend income of £11,384 every year.
This is also based on the dividends being reinvested back into the stock – dividend compounding.
Will I buy the stock?
I already hold several high-yielding stocks and am happy with these. However, if one of them consistently underperforms, I will replace it with Taylor Wimpey.
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Simon Watkins 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.
