Should you buy shares in the FTSE 100’s Taylor Wimpey right now?

Is Taylor Wimpey plc (LON: TW) a bargain or a value trap?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I said in an article in February that housebuilder Taylor Wimpey’s(LSE: TW) then forward dividend yield of just over 8% was “attractive if you remain mindful of the cyclical risks.” Back then, the share price was at 190p and today it’s close to 166p, having been near 150p in October. I think those cyclical risks have been making themselves known.

Yet, the stock looks awesome on paper. The quality indicators look good, with the return on capital figure running near 22% and the operating margin above 20%. The valuation seems wonderful, with a forward price-to-earnings ratio at about 7.5. Then there’s that magnificent forward dividend yield that has breached 10% for 2019 – what could possibly go wrong if we invest now?

A big part of the dividend is at risk

One potential danger zone, I feel, is that most of that fat dividend is classified by the company as ‘special’. Around two-thirds of the 2018 payment is a special dividend with just the remaining third being classified as an ordinary one. The directors plan to keep paying the ordinary part of the dividend through any “normal” economic downturn, but the special dividend could be axed. I think there is a great hazard in that because if the special dividend gets the chop, I can’t imagine the share price doing anything else but plunging.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

I think the stock market has been marking down Taylor Wimpey’s valuation because its profits have been growing. The big worry is that something will change in the property market to stop the housebuilders from earning ever greater profits year after year. Taylor Wimpey is, after all, a company running a highly cyclical business and the market ‘knows’ that big profits will cycle down again to smaller profits, it just doesn’t know when, so it’s keeping a lid on the valuation.

Volatility ahead?

To me, that means the share price is unlikely to shoot up hard and fast in the near future. However, what I do think is that it will be volatile from now on. As soon as there’s the merest suggestion of a slowdown, the share price will likely react by plunging, just as we’ve seen over the past month or so. Meanwhile, City analysts following the firm don’t expect much in the way of growth in earnings — just 4% this year and again next year, which is a long way from the robust double-digit advances we’ve become used to recently.

Earnings are starting to look toppy to me, even though the company is making plenty of positive noises about operations and forward trading. So I think the big dividend will remain, and the valuation will stay low, perhaps for years, with the share price wiggling up and down in an uneasy state of anxiety. But one day, I believe the dividend, share price and earnings will all plunge together. In the meantime, the stock should continue to flaunt its attractions, like a Venus flytrap ready to snap shut when the time is right. You could fly in and drink the nectar of that yield, and you could get away with it, time after time… until you don’t!

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »

Investing Articles

When will Lloyds shares hit £1?

Lloyds shares have surged over the past 12 months, but where will they go next? Dr James Fox thinks there’s…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »