Choosing good companies for your Stocks and Shares ISA portfolio is one thing, but it also pays to check whether the sector they operate in is also healthy.
Taylor made for you
After the 2016 EU referendum shock, investors dumped housebuilding stocks en masse, believing the sector would be hammered by the economic uncertainty to come. Pretty much every stock fell as one, regardless of their individual prospects.
They have been rising as one ever since, as demand for property has held firm, underpinned by the housing shortage and Help to Buy scheme.
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Housebuilder Taylor Wimpey (LSE: TW) has been a beneficiary, rising almost a third in the last 12 months alone. Measured over five years, the Taylor Wimpey share price is up more than 60%, despite the post-Brexit crash in the middle of that period.
The FTSE 100 stock is up aother 4% today, following publication of a promising trading statement for the year ended 31 December 2019, ahead of next month’s full-year results.
CEO Pete Redfern said results are in line with expectations, despite political and economic uncertainties, as the group continues to experience “a good level of demand for our homes”, with second-half trading as anticipated.
Capital challenge
The housing market remains stable, although conditions are a bit more challenging in London and the South East, and at the more expensive end of the market.
Taylor Wimpey completed 5% more houses, 15,719 in total, with the reservation rate rising strongly and cancellation rates low. House price growth is flattening, though, up just 1% on private completions to an average of £305,000.
I like to see a strong order book, as this suggests healthy demand and earnings going forward, and here Taylor Wimpey doesn’t disappoint. At the end of last year, it recorded record total orders of £2.18bn, up 22% over 12 months. One headwind is that building costs rose 4.5%, although cost pressures appear to have eased lately.
The right balance
An economic slowdown or house price crash is always a threat when holding housebuilding stocks but Taylor Wimpey has a strong balance sheet, with net cash of £546m at the end of last year giving protection against any downturn. That is despite paying £600m in dividends to shareholders last year, up from £500m the year before.
I like investing in cash-generative businesses like this one, especially when they are so keen for shareholders to benefit. As Taylor Wimpey previously announced, it intends to return £610m to shareholders this year, as a total dividend.
The housing market has been anticipating a ‘Boris bounce’ ever since the election, and today Taylor Wimpey welcome the increased political stability.
Despite this positive outlook, the £6.8bn company trades at a modest valuation of just 9.7 times earnings, giving scope for further share price recovery, and a cushion against any setbacks. The forecast yield is a whopping 9.3%, making this one of the most generous income stocks on the FTSE 100. Buy now and you could enjoy a share of next year’s bumper £610m dividend spree, with the hope of more to come.
