There’s no doubt that housebuilders such as Taylor Wimpey (LSE: TW) were boosted by December’s election result. Over the last three months, shares in this FTSE 100 firm have risen by about 28%.
A profitable year for shareholders
Shareholders who’ve held the stock over the last year will have seen a much bigger gain.
Since 21 January 2019, the Taylor Wimpey share price has risen from 156p to a last-seen level of 212p. That gives us a gain of 36%.
In addition to this, the company has paid out total dividends of 18.3p per share during the period. That’s equivalent to an 11.8% return on last year’s share price.
In total, I estimate that Taylor Wimpey shareholders have enjoyed a total return of almost 48% over the last year. Pretty impressive.
Should you keep buying?
But I think there are lots of reasons to be cautious about housebuilding stocks at the moment.
House prices are high and in many cases are only made affordable by ultra-cheap mortgages and Help to Buy loans. Yet the Help to Buy scheme is due to end — or at least change — over the next few years.
And although they pay huge dividends, housebuilding shares are not necessarily that cheap. Taylor Wimpey shares trade currently trade at 2.3 times their book value. That represents the net value of the firm’s land and inventory, less any financial obligations.
In my view, that’s a fairly steep valuation. What it tells me is that profit margins on new homes are very high at the moment. If the housing market weakens, then this could change and the shares could fall.
But demand is strong!
The problem is that demand for new housing still seems to be very strong.
I think we can assume that the Conservative government will be supportive of private housebuilders and will not want to crash the housing market.
I also think it’s fair to assume that interest rates will remain low for the foreseeable future. I expect mortgages to remain cheap, given the high level of competition for new customers.
Taylor Wimpey’s own trading certainly seems strong. The company reported a record order book of £2,176m at the end of 2019. That represents 9,725 homes, or roughly 7.5 months’ sales.
The top of the market?
So far, there’s no sign that demand for housing is slowing.
Despite this, rising costs could put further pressure on profit margins. According to management, Taylor Wimpey’s operating profit margin is expected to have fallen from 21.6% to 19.6% in 2019.
Although that’s still very high, it’s a substantial drop in one year. My colleague Graham Chester thinks it could be a sign that we’ve seen the top of the market.
It’s also worth noting that City analysts have become more cautious about the outlook over the last 12 months. Their forecasts for 2020 show profits staying flat this year and suggest very little dividend growth.
My decision
I’m not buying Taylor Wimpey or any other housebuilder at the moment. I just don’t believe they’re really cheap enough for me to build a long-term holding.
However, there’s no doubt that the profits and cash being generated by this firm are impressive. This stock offers a forecast dividend yield of 8.7% for 2020. Right now, I can’t see any reason why this won’t be delivered.
I’ve made my choice. But I could be wrong — over to you.
