Taylor Wimpey’s LON:TW. published its results on a busy day on the LSE today (2nd March). The Armchair Trader has been tracking this stock for a while, given the housebuilder’s awful share price performance through 2022.
We were hoping for a turnaround in the share price, and our technical analysis from A.I. engine, Deshe Analytics and investor behaviour data provider, Irithmics suggested that investor sentiment – especially from the bigger allocators, like pensions funds – was starting to swing in Taylor Wimpey’s favour.
Consistent dividend policy
We noted at the time that a big attraction to the stock was its dividend policy, with yields at the time in the region of 9.9% – a winning strategy in a yield-hungry year. Analysts at the time were predicting 9.1p for the year and 9.52p for this year, which definitely attracted investors across the spectrum. The company announced an ordinary dividend per share of 9.4p.
We also noted that management were running the FTSE100 company in a sensible and sober way, despite the economic turmoil that was directly affecting the housebuilder sector and property market as a whole.
This was something that Taylor Wimpey’s CEO, Jennie Daly noted in a statement to the market this morning: “”In a year marked by two distinct halves, we acted quickly and decisively to address rapidly changing market conditions in the second half of the year and continued to focus on operational excellence and efficiency. While the weaker economic backdrop continues to impact the near-term outlook, customer interest in our homes remains good and, whilst it is still early in the year, trading has shown some signs of improvement compared to 4Q22.”
- Companies Reporting: Ocado, Persimmon, Experian
- Three Quick Facts: Persimmon, Marks & Spencer, JD Wetherspoon
- Three Quick Facts: Beazley, Helios Towers, Persimmon
Taylor Wimpey’s shares opened trading today at 116.4p and had risen to 119.45p within the first hour of trading. Over the year the stock has returned 16.72%, but over 12-months, Taylor Wimpey was still down -16.1% with shares ranging between 80.6p and 149.2p.
Compared to the FTSE100’s performance of 6.2% over one year that’s quite disappointing. However, the FTSE100 has only put on 4.5% year-to-date, so in comparison Taylor Wimpey could be seen to be having a bit of a rally. The All-Share Index was a bit more subdued at 4.3% in the last year and up 4.4% year-to-date.
Long-term sustainability
We remain broadly bullish on Taylor Wimpey and stand by our assumption that although in the short-term things will be tough for the building company, the company’s long-term prospects remain relatively attractive. An ongoing supply/demand imbalance in the housing market, a large land bank in a concentrated industry and a low valuation suggests the firm has recovery potential. Meanwhile, its solid financial position means it has the capacity to overcome – and even take advantage of – a tough period for the wider housing industry.
The results showed embers of recovery, with most of the important numbers pointing in an upward direction. Revenue was up 3.2% year-on-year to GBP4.4bn, with operating profit up 11.4% to GBP923.4m on a margin of 20.9%. Profit-before-tax was GBP827.9m, up 21.8% and basic EPS was 18.1p, up 18.3%. The housebuilder even managed to increase its net cash position by 3.7% to GBP863.8m. In a year scarred by significant increases in inflation and mortgage borrowing rates and falling house prices, this was indeed sensible and prudent management.
Taylor Wimpey’s improved net cash position should provide it with the means to survive even the very worst economic crisis and the first vestiges of a potential housing market bust that has started to form in the last few months. Indeed, it could be argued that a tough period for the wider industry will strengthen the firm’s market position as smaller, less financially-sound businesses struggle to a greater extent. The firm could also take advantage of the distressed market and increase its land bank holdings as its smaller competitors are forced to take urgent action to bolster their own reserves as prices and demand fall by selling some of their assets. Buying cheap, selling expensive is a sure-fire way to future profitability.
Operational focus
Daly added: “Looking forward, we have a strong proposition that is clearly recognised and valued by our customers, supported by our sharp operational focus and highly experienced teams. We have a high-quality, well located landbank and a strong financial position which underpins our Ordinary Dividend Policy of paying out 7.5% of net assets, or at least GBP250m, annually throughout the cycle.”
It’s not all good news though. Investors can’t ignore that we are in a situation where housebuilders will take a hit and Taylor Wimpey isn’t immune to market risk. As we noted yesterday, Taylor Wimpey’s competitor Persimmon LON:PSN sounded a gloomy note, with Charlie Huggins, head of equities at the Wealth Club commenting: “[…]this year [Persimmon] is facing significant margin pressures. Cost inflation still remains a problem, while the group warns that the number of home completions could fall to around 8,500 this year, down from c. 15,000 in 2022.”
You could as easily substitute ‘Taylor Wimpey’ for ‘Persimmon’ in the comment above, with Daly saying: “While it is encouraging to see an uptick in sales and ongoing robust customer interest in our homes […] our reservation rate is significantly lower than in recent years as affordability concerns weigh, particularly for first time buyers, and we have reflected this in our build programmes for the year.”
Sales expected to fall
The company reported sales down to 0.62 per outlet per week, a fall from 1.02 from last year and the country’s number two housebuilder is cutting its cloth accordingly, announcing the first round of redundancies in the regional businesses as part of a GBP20m cost-cutting drive, expected to cost GBP8m to implement. Last year Taylor Wimpey completed around 14,000 homes. This year it expects to complete 9,000 to 10,500 units.
Housing is a very cyclical market, with high barriers to entry and over the longer-term we would expect Taylor Wimpey to shine, given the demographic pressures and lack of supply in the market. The bigger providers, if they stay the course, can expect to remain profitable and despite the end of the help-to-buy scheme for first-time buyers, it is likely that future administrations will create new schemes to deal with the problem of a lack of housing stock, something that will be will us for a long time to come.
Deshe Analytics retains its ‘Hold’ rating for the stock, saying: “Taylor Wimpey’s recently released results […] indicate that it is performing reasonably well and on par with its peers. It is highly likely that it will be mostly tethered to market performance and sector movements for the near term. Bottom line, Taylor Wimpey’s financials indicate solid performance in terms of growth and income, which leads us to believe that they may become interesting again in the next few months. But for right now, we gave the company an overall grade of 71 and a ‘Hold’ recommendation.”
