Is this 9.7%-yielding second income opportunity too good to be true?
There are countless opportunities to unlock a second income in the British stock market today across a wide range of industries. And one stock that income investors have started to take notice of is Taylor Wimpey (LSE:TW.).
With the stock tumbling more than 40% in the last 12 months, the shares are now offering a jaw-dropping 9.7% dividend yield! And it seems investors see this as a bargain buying opportunity. At least, that’s what the latest investment data from AJ Bell suggests, given that Taylor Wimpey shares were the seventh most popular purchase in August.
So is this indeed a fantastic passive income pick right now? How much money could investors start earning overnight? And is buying shares actually a good idea? Let’s explore.
What’s up with Taylor Wimpey?
The sharp drop in the Taylor Wimpey share price isn’t too difficult to explain. The firm’s been encountering multiple headwinds in the last 12 months that have put pressure on its earnings, including inflationary pressures from rising input costs.
However, one of the biggest concerns emerged in its latest interim results, where management increased the provision for cladding fire safety by £222.2m.
This unexpected expense was enough to send net operating expenses flying from £198.7m in the first half of 2024 to £362.9m. Consequently, last year’s £99.7m profit before tax swung into a massive £92.1m loss over the same period. The weaker earnings actually resulted in a dividend cut. And with guidance also getting revised down, it’s not surprising that the stock took a tumble.
A new buying opportunity?
The stock’s now trading at a new 52-week low. But in terms of financial strength, the group’s balance sheet still has its strong points. Its net debt position remains relatively low, and management has access to £600m of an unused revolving credit facility. That means Taylor Wimpey has just over £1bn of liquid assets at its disposal.
There’s no denying the group is surrounded by short-term uncertainty. But looking out further to the future, the group’s potential seems to remain sound. Home completions are on the rise, it has a bulky order book of 7,269 homes, and its landbank has 76,000 plots waiting to be developed (enough to keep it busy for the next seven years) with another 135,000 potential plots in the pipeline.
Combining all this with a forward price-to-earnings ratio of 11.3 certainly points towards a potential value opportunity. And the firm’s large pool of liquidity also suggests that management has the flexibility needed to maintain shareholder payouts at their current level.
Pause for thought
Despite the seemingly lucrative second income opportunity on offer, I’m not in any hurry to buy Taylor Wimpey shares right now. Falling interest rates are helping spark fresh life into the British housing market. But it’s still unclear when conditions will improve. In fact, the firm has warned that conditions were softening in the second quarter.
If this trend persists, management may need its revolving credit facility to keep operations running smoothly rather than support shareholder payouts. As such, there remains a very real risk of yet another potential dividend cut on the horizon. That’s why I think there are other safer income opportunities to explore.
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Zaven Boyrazian 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.
