- Taylor Wimpey's stock price is approaching its yearly lows due to uncertain macroeconomic conditions in the UK.
- Despite declining home builder margins, Taylor Wimpey is set to remain profitable moving forward.
- With a PE ratio of 11 and a dividend yield of 7%, this stock is a fantastic dividend income addition to any portfolio.
Note this article refers to the UK listed Taylor Wimpey plc, and all amounts given are in GBP unless otherwise specified.
Taylor Wimpey plc is a residential developer with operations in the UK and Spain. The main attraction to the company's stock comes from its fantastic dividend distribution which results in a yield of around 7% based on today's price.
Brexit worries have caused jitters in the residential housing market in the UK, causing most building related stocks to fall, however, the chronic housing shortages in the UK will continue indefinitely. While margins may depress slightly in the short term in the industry as housing values fall, Taylor Wimpey's solid financial position is strong enough to steer the company through these temporary market fluctuations:
During 2017, Taylor Wimpey's underlying build cost per unit increased to £143.7k from £137.2k in 2016, which reflects the increasing inflation in underlying build costs (an increase of 3.5% y/y):
Despite these issues, the current low market valuation combined with a strong support level at 180 GBX should limit any downside risks in the stock, providing an attractive opportunity to enter a long term position:
(Source: Google Finance)
The market has not priced in any potential growth in Taylor Wimpey's international operations, despite positive indicators in the company's Spanish operations:
(Ryan Mangold - Group Finance Director, Taylor Wimpey): Spain delivers £26.8 million worth of operating profit in the period; it’s up 30 percentage points on 2016, off a fairly similar number of home completions. And with a strong order book of over 300 homes and by value up by 21% on 2016, and demand remaining good, positions the business really well to continue to make progress into the future. We have maintained our investment strategy in Spain of marginal growth and the high-quality land bank that currently stands at 2,675 plots is up 25% in 2016.
(Source: Taylor Wimpey's 1H18 Investor Presentation Transcript)
The gradual improvement of the Spanish economy will provide strong tailwinds for Taylor Wimpey's operations there. While management has no indicated any plans for further international expansion into other regions, this certainly remains a possibility in the future, and the skill management has displayed in successfully operating in Spain would translate well to other regions, and as such, the market should not completely discount the possibility.
Future Growth in Domestic Operations
Domestic (NASDAQ:UK) consumer interest in Taylor Wimpey's building services reached record highs in 2017 despite Brexit and property downturn concerns, with record appointments being booked indicating Taylor Wimpey's resilience to market headwinds:
(Source: Taylor Wimpey's 1H18 Presentation)
Management remains bullish despite the challenges posed by Brexit:
We have been encouraged by early trading patterns at the start to the year and despite some wider macroeconomic uncertainty, consumer confidence remains robust and market fundamentals are solid.
We grew volumes to nearly 15,000 homes during the year and are focused on delivering much-needed homes across the UK to the highest quality and standard. Importantly, we are pleased to see that our investment in customer service has resulted in a notable improvement in our customer satisfaction scores.
The continued investment in research is vitally important for the future of Taylor Wimpey's domestic operations as it enables the company to maintain (and expand) their market share, as responding to changing consumer tastes in housing/architecture aesthetics is key to attracting and retaining home buyers.
Research and development is a key area for us as we seek to understand what our future customers will want and need. Our Taylor Wimpey Project 2020 design competition in partnership with the Royal Institute of British Architects (RIBA) was launched in 2016 with the aim of informing our future house type range. The competition attracted over 100 entries from 14 different countries. The ‘Infinite House’ designed by Open Studio Architects, based in London, was chosen and the winning design will be prototyped on some of our sites in 2018.
The success in management's investment in the area are apparent with the markedly increased consumer satisfaction scores received throughout 2017:
During 2017, we achieved a customer satisfaction score of 88% (2016: 85%), reflecting the number of customers who were satisfied with the quality of their Taylor Wimpey home and 89% of customers would recommend Taylor Wimpey to a friend, based on the Home Builders Federation (HBF) survey. The survey is conducted by the National House-Building Council (NHBC) at eight weeks after completion to monitor our performance and identify areas for improvement.
With an ever-increasing population requiring housing, the future of Taylor Wimpey's domestic operations is secure despite temporary Brexit related headwinds:
Taylor Wimpey has increased its revenue consistently over the last 4 years and, despite the macroeconomic headwinds posed by Brexit, I believe it will continue to perform strongly into the future.
The company maintains a simple yet strong balance sheet, with reasonable debt levels considering the home-building industries' average. This disciplined capital management will enable Taylor Wimpey to continue to payout its high dividend distribution into the foreseeable future.
Taylor Wimpey plc makes a fantastic addition to any dividend portfolio due to its temporarily depressed stock price, high yielding dividend and secure future growth prospects. The strong price support on the daily charts at 180 GBX limits downside risk.
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