It doesn’t matter that trading conditions for Britain’s homebuilders remain pretty strong. Investors remain on tenterhooks over the health of the broader housing market right now, and this was illustrated by the bouts of heavy selling which accompanied Taylor Wimpey’s (LSE: TW) interims released on Thursday.
The market brushed off news that Taylor Wimpey (LON:TW) achieved “a record sales rate” in the six months to June, a result underpinned by “strong customer demand for our homes in a stable market.” It also ignored advice that plans to build more homes on bigger sites had been “coming through more quickly than anticipated.”
Share pickers were more interested in the fractional dip in pre-tax profit from a year earlier, to a shade under £300m, caused by higher costs — an increasingly troublesome issue for Taylor Wimpey and its peers — and an unfavourable geographic mix versus a year earlier. Margins at the firm dropped two percentage points to 18% for the period.
Radical selling Investors are quite happy to disregard the fact that each of the FTSE 100’s housebuilders, not to mention the lion’s share of their industry colleagues on London’s lesser indices, are trading on forward price-to-earnings (P/E) ratios of 10 times or below. For many, their low valuations reflect a belief that the risks to future profits far outweigh any potential rewards.
This is an example of some extreme short-termism, in my opinion. Sure, we may be seeing a hiatus on the electrifying house price growth from the mid-1980s but there’s scope for the homebuilders to keep profits on a stable level. And that’s no mean feat considering the significant weakness we’re seeing in the broader UK housing market.
Make no mistake: the epic supply/demand imbalance in the homes shortage which is keeping new-build sales ticking ever higher is set to remain for years to come. And this naturally bodes well for the likes of Taylor Wimpey.
Housing starts have receded sharply in recent decades, and despite that aforementioned shortage, inadequate government policy means that build rates still aren’t picking up. Indeed, the homebuilders broke ground on just 36,630 new residences in England in the first three months of 2019, official data has shown, down 9% year-on-year and the lowest number for three years.
A great long-term bet It’s no wonder that Taylor Wimpey feels confident enough in its profits outlook to keep supercharging dividends. It raised the interim dividend an astonishing 57% to 3.44p per share, but the good news did not end there, the business announcing plans to pay another special dividend (to the tune of 11p per share) in 2020.
As a consequence, Taylor Wimpey predicts total payouts of 18.34p and 18.6p per share for this year and next, figures that yield a staggering 11.4% and 11.6% respectively.
Despite the impact of Brexit on the wider housing market more recently, Taylor Wimpey has still delivered a total shareholder return of 87.6% in the three-and-a-bit years since Britain voted to leave the European Union. This triumph in adversity illustrates the strength of the Footsie firm and its blue-chip peers. And I fully expect returns to really take off once broader buyer confidence returns to the market.
Royston Wild owns shares of 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.
Motley Fool UK 2019