Enthusiasm for Britain’s housebuilders remains soggy as investors fear the impact of Bank of England (BoE) rate rises. Taylor Wimpey’s (LSE: TW) share price, for example, has slumped 12% since the beginning of the year, to 146p. This means on a 12-month basis, the FTSE 100 stock is down 17%. It’s my opinion that share pickers are being far too cautious on housing stocks like this.
I have no intention of selling my own Taylor Wimpey shares. As BoE data shows today, the UK homes market remains extremely robust. Some 74,000 mortgage approvals for property purchase were signed off in January. That remained some way above the 12-month pre-pandemic average of 66,700 monthly approvals up to February 2020.
Taylor Wimpey’s own comments in late January also underlined the resilience of the housing industry. It then reported that “we continue to see strong demand for our homes” and that its order book was already 47% sold for 2022.
Encouragingly, the company’s so confident about its profits outlook that it plans to launch a buyback programme to return excess cash to shareholders.
Cash machine
Taylor Wimpey’s excellent cash generation is what encouraged me to first invest (along with FTSE 100 counterpart Barratt). Its rich balance sheet allowed the business to pay some mouth-watering dividends.
So I’m pleased that despite the problem of rising building costs, Taylor Wimpey remains an impressive cash-creating machine. Net cash surged to a forecast-beating £837m as of December, up from £719.4m a year earlier.
It’s no surprise to me that City brokers predict more big dividends will be coming down the line then. Last year’s predicted 8.55p per share reward is anticipated to rise to 9.47p in 2022. This leads to a mighty 6.5% dividend yield, one that smashes the broader FTSE 100 average of 3.6%.
The good news doesn’t end here either. A total dividend of 9.88p per share is anticipated for 2023 too, creating a handsome 6.8% yield.
A FTSE 100 stock I’d buy more of
Recent market volatility means many UK shares carry big dividend yields which look pretty flaky. However, I think the predicted dividends at Taylor Wimpey look pretty secure. On top of that strong balance sheet, anticipated payouts for the next two years are covered 2 times over by expected earnings. A reading of 2 times and above is regarded as the benchmark for investors to be confident in dividend projections.
Those City analysts also reckon annual earnings will rise 8% in both 2022 and 2023. Consequently, Taylor Wimpey also trades on a rock-bottom forward price-to-earnings (P/E) ratio of 7.7 times.
Like any UK share, Taylor Wimpey isn’t without risk. Future BoE rate rises could hit demand for homes, and rising raw materials costs pose another danger to profits. However, these are threats I think are reflected in that low earnings ratio several times over.
At current prices I’m thinking of buying more of the FTSE 100 business.
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Royston Wild owns Barratt Developments and Taylor Wimpey. 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.
