Could this be the year that everything suddenly goes right for Taylor Wimpey (LSE: TW) shares? Possibly. But it would require a dramatic reversal in fortunes.
Shares in the FTSE 100 house builder have fallen by a third in the last six months, and are down 20% over 12 months to trade at a 52-week low.
Can we blame Donald Trump, as global stocks sell off due to his trade tariffs? Not directly, as Taylor Wimpey isn’t building condos in Miami. However, UK housebuilders seem to be caught in the crossfire of every major political or economic change.
They crashed 40% after the Brexit vote, were up and down in the pandemic, and have struggled through the cost-of-living crisis. Now they’re under pressure again as inflation proves sticky and mortgage rates stay higher for longer than markets hoped.
They also have their own sector-specific worry, due to an ongong Competition and Markets Authority investigation into claims they exchanged “competitively sensitive information” potentially leading to price collusion. If they are found guilty, that could prove costly.
Even hopes that Labour might inspire a housebuilding boom haven’t lifted the shares, perhaps because a surge in supply could push prices down.
Personally, I doubt that will happen. Labour’s plan to build 1.3m homes in five years looks wildly optimistic, while the UK population is still growing fast. The real question is whether people can afford new-builds at all, given weak economic growth and high borrowing costs.
Taylor Wimpey’s latest results from 27 February showed 2024 revenues down 3.2% to £3.4bn and pre-tax profits plunging 32.4% to £320.3m.
The number of homes built fell to 10,593 from 10,848, and the average selling price dipped from £370,000 to £356,000.
Incredible dividend yield
Taylor Wimpey also has to swallow the hiking employers national insurance contributions from this month, plus the inflation-busting 6.7% minimum wage increase. Sticky inflation will also push up material costs, while skilled labour shortages add another headache.
All this has left the shares looking cheap. They trade at just 12.64 times earnings and come with a bumper forecast dividend yield of 8.85% for 2025. The company boasts a solid balance sheet and a strong track record of rewarding shareholders, with a policy to return 7.5% of net assets (or at least £250m annually) in dividends.
The 16 analysts covering the stock produce a median 12-month price target of 145.8p. If that proves accurate, it would be a juicy rise of almost 36% from today’s price. Throw in the yield, and the total return could be around 45%.
Since I hold the stock, I’d happily take that. But I think it looks optimistic.
The real game-changer would be falling interest rates. Cheaper mortgages would make homes more affordable and could spark a fresh wave of demand. But there’s no telling when that will happen. Trade wars could keep inflation stubbornly high, delaying cuts. Or they could hammer economic growth, forcing central banks to act sooner. Either way, when rates do drop, Taylor Wimpey’s fat dividend yield will look even more attractive.
That’s an exciting prospect, but a lot has to go right for it to happen. I’m retaining my shares and my optimism, but history shows housebuilders often look like a bargain, when they might just be a value trap.
This post was originally published on Motley Fool
