A potential housing market crash and possible dividend cuts have seen FTSE property stocks crumble over the past year. Nonetheless, Taylor Wimpey (LSE:TW) shares are still my top picks for their long-term potential and passive income avenue.
About Taylor Wimpey Plc
Last updated 03-02-2023, 04:30:00pm GMT
124.10p
-2.40p (-1.9%)
124.10p
125.65p
124.05p
124.20p
122.10p – 125.84p
80.64p – 155.40p
13,235,140
12,844,558
437,191,816,600.00p
16.03p
Unstable grounds
An ugly combination of rising inflation and high interest rates has driven mortgage rates to a multi-year high. Consequently, demand and house prices have cooled, with all three housing indexes seeing declines since the summer.
Data source: Nationwide, Halifax, Rightmove
Hence, it was no surprise to see the disappointing numbers Taylor Wimpey shared in its latest trading update, as the housebuilder posted substantial declines in most areas.
Metrics
2022
2021
Growth
Total completions
14,154
14,302
-1%
Net private reservation rate
0.68
0.91
-25%
Cancellation rate
18%
14%
4%
Average selling price
£313k
£300k
4%
Book value
£1.94bn
£2.55bn
-24%
Total landbank
144k
145k
-1%
Data source: Taylor Wimpey
Sentiment surrounding the property market hasn’t improved since either. The latest data from the Bank of England (BoE) showed that mortgage approvals (a leading indicator for the property market) continued to decline in December. In fact, approvals have now dropped to levels not seen since the peak of the pandemic and during the 2008 financial crisis. Therefore, building societies and banks are anticipating house prices to fall from anywhere between 8% and 15% this year.
Data source: Bank of England
Constructing a second income
Nonetheless, I believe Taylor Wimpey still presents a long-term investment opportunity for growth and passive income. Thanks to its strong fundamentals, it’s unlikely that the FTSE 100 stalwart will have to raise capital through debt or equity, which is great news for shareholders like myself. More importantly, its strong balance sheet gives it a dividend cover of 2.1 times.
Data source: Simply Wall St
Additionally, Taylor Wimpey shares have a strong history of paying steady and growing dividends, which is what I’m looking for as an investor seeking a second income. Payouts may be lower this year, but a forecast 7.1% forward dividend yield is still generous enough to pique my interest.
Data source: Taylor Wimpey, Financial Times
That said, it’s the longer term on which I’m focused. I imagine the property market will recover and profits will grow over the next five to 10 years. As such, we could see a return of hefty special dividends. Although there’s no guarantee of that, the prospect of such a huge payout in the future is certainly enticing.
A chance to build wealth
Despite the doom and gloom surrounding the market, it’s been a relief to see last year’s headwinds starting to subside. As inflation continues to drop, the Bank of England is likely to pause its rate-hiking cycle soon. This could see mortgage rates stabilising and even declining, providing some support for house prices and the Taylor Wimpey share price in the medium term.
Nationwide Chief Economist Robert Gardner said there have been some “encouraging signs that mortgage rates are normalising”. And even though it’s still too early to determine whether activity in the market has started to recover, broker Liberium believes the housing market decline isn’t as bad as initially feared.
So, is the stock a buy for me? Well, the likes of Jefferies, Barclays, and Citi all have ‘buy’ ratings. Nevertheless, their average price target of £1.23 would indicate that the shares are currently fairly valued. Current and forward valuation multiples suggest so too. For those reasons, I’ll be looking to add to my current position while the stock is still fairly priced.
Metrics
Valuation multiples
Industry average
Price-to-book (P/B) ratio
1.0
0.9
Price-to-sales (P/S) ratio
1.0
0.8
Price-to-earnings (P/E) ratio
7.5
11.2
Forward price-to-sales (FP/S) ratio
1.1
1.2
Forward price-to-earnings (FP/E) ratio
9.0
8.7
Data source: Simply Wall St
The post Taylor Wimpey shares: my top passive income buy appeared first on The Motley Fool UK.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended Barclays Plc. 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.