A 9.7% dividend yield, but I’m avoiding Taylor Wimpey shares like the plague

The last 12 months have been tough on Taylor Wimpey (LSE: TW.) shareholders with the share price down 41%. Such a dramatic fall has seen its market cap going below the requisite amount needed to maintain a spot in the coveted FTSE 100, so relegation beckons in the next reshuffle.

A falling share price has pushed up the dividend yield to an eye-popping 9.7%, but the number one question is: just how sustainable is it?

Cyclical industry

I have no doubt that the housebuilder is a well run company. It has an extremely strong balance sheet and an enviable land bank. But it operates in a notoriously cyclical industry, one that it has no control over.

At its H1 results back in the Summer, it reported an 11% increase in house completions to 5,264. But it went on to warn that the âmarket has softened more recently and is a little bit more uncertain than we hoped for coming into the year.â

At the beginning of the year, everything looked so different with multiple interest rate cuts predicted. Yes, rates have come down but nowhere near as fast or as much as many analysts were predicting.

Yesterdayâs (17 September) inflation print of 3.8% will make the Bank of England think twice about pushing rates much lower than its current 4%.

Cladding woes

Piling the pressure on the stock was the recent announcement that it was increasing its cladding provision by Â£222m. This represents a significant leap on its Â£314m estimate back at the end of 2024.

Its initial estimate was based on a surface building assessment across its estate. However, as the assessments have become more intrusive, the true extent of the cost of meeting government regulations has emerged. This includes cavity barrier defects located behind external finishes such as brickwork and render.

The question I must ask myself now, is are there any other nasty surprises in store? What we do know is that as a result of the underestimate, cash outflows are expected until 2030.

Recession fears

If there is one word that strikes fear into any housebuilder, then that word is recession. During the last major prolonged recession back in 2008, falling house prices resulted in balance sheet deterioration.

Today, the government data is not pointing to any significant downturn on the horizon. Unemployment remains low and wage growth is contributing to improved affordability. That is good news for the builder.

However, as an investor, I believe I need to ask some serious questions concerning the validity of this data. Anecdotally, I see a labour market that is cooling significantly. What I do know for sure is that years of elevated inflation have altered consumer behaviour in so many different ways.

At the moment, first-time buyers, the lifeblood of any housing market, have effectively been frozen out. Massive house price inflation in the wake of all the stimulus after Covid has shown no real signs of reversing, despite mortgage costs rising.

Taylor Wimpeyâs dividend yield is sorely tempting. But it has already cut the interim dividend and should its balance sheet show signs of stress, it will undoubtedly cut again. For me, given the present economic backdrop, the risks are simply too great and so I will not be investing.

The post A 9.7% dividend yield, but Iâm avoiding Taylor Wimpey shares like the plague appeared first on The Motley Fool UK.

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Andrew Mackie 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.