I just bought even more Taylor Wimpey shares but I have 1 big worry
Iâm a big fan of Taylor Wimpey (LSE: TW) shares but sometimes I wonder why. Theyâre now trading at levels last seen a decade ago, which is pretty shocking.
Itâs not a problem unique to Taylor Wimpey. The housebuilding sector has been battered by every economic shock since Brexit. Inflation lifted the cost of building materials, while higher interest rates made buyers nervous and hit affordability. Last yearâs Budget piled on extra expense by hiking both employersâ National Insurance and the Minimum Wage.
Inflation was 3.8% in July and the Bank of England (BoE) expects it to push towards 4% in September. The BoE did cut rates to 4% in August, but lenders have been slow to pass on cheaper mortgages. Conditions remain tough, and that was clear in Taylor Wimpeyâs latest results.
Is this a FTSE 100 bargain?
On 30 July, it posted a pre-tax loss of £92.1m for the first half, compared with a £99.7m profit a year earlier. It was forced to lift its cladding fire safety provision by £222m after new inspections and also set aside £18m following a Competition and Markets Authority probe.
Operating profit guidance for 2025 has been trimmed from £444m to £424m. The interim dividend was cut to 4.67p from 4.8p, which was a disappointment for income seekers.
Management insisted underlying performance was steady and that long-term demand for housing remains strong, but the immediate reaction from investors was downbeat.
The stock took another knock on 2 September when Bank of America downgraded it from Buy to Neutral. Analysts highlighted slow progress on new outlets, unresolved fire safety issues, weak second-quarter sales and concerns that dividend cover looks thin.
Recovery stock or value trap?
The shares are down 38% over 12 months, making Taylor Wimpey the second-worst performer in the FTSE 100 after advertising giant WPP. That compares with sector rival Persimmon, down 32%, and Barratt Redrow and Berkeley Group Holdings, both down around 26%.
Yet brokers see recovery potential. Consensus one-year forecasts put the median target at 133.2p, implying a 37% uplift from today. Add in the dividend yield and total returns could reach 45% if those numbers are right. Out of 19 analyst ratings, 10 call it a Strong Buy, one a Buy and seven a Hold. Just one says Sell.
Taylor Wimpey now has a massive trailing yield of 9.75% and trades on a price-to-earnings ratio of 11.6, which suggests good value. That combination of income and low valuation persuaded me to average down on 5 September but I have a lingering concern.
Housebuilders could struggle
My worry is whether housebuilders are ever truly good investments. They sit on the frontline of every economic problem. Housing demand is strong, but supply is capped by land shortages, planning delays, labour costs and the sheer cyclicality of the market. Maybe low valuations are the norm for the sector.
That bumper yield looks appealing but itâs already been trimmed once. A further cut could damage sentiment, especially a big one. Iâm still backing a recovery, but I know it isnât guaranteed. Other investors might consider buying too, but they should understand the risks before doing so.
The post I just bought even more Taylor Wimpey shares but I have 1 big worry appeared first on The Motley Fool UK.
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Harvey Jones has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended Barratt Redrow. 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.
