Taylor Wimpey (LSE: TW.) shares are quite popular within the UK investment community. One reason for this is that they offer a high dividend yield.
Thinking of buying shares in the housebuilder? Here are three things investors should know.
Near-term challenges
Let’s start with the fact that 2023 is likely to be a challenging year for the company.
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In its recent 2022 results, Taylor Wimpey said that the weaker economic backdrop, and housing affordability concerns, were currently impacting the group’s performance.
Our reservation rate is significantly lower than in recent years as affordability concerns weigh, particularly for first time buyers, and we have reflected this in our build programmes for the year.
Taylor Wimpey’s 2022 results
As a result, at 26 February, its total order book (a key industry measure that gauges future performance) was £2,154m versus £2,899m a year earlier.
Meanwhile, for 2023, it expects to achieve 9,000 to 10,500 home completions, versus 14,154 in 2022. In other words, completions are set to fall significantly this year.
So, Taylor Wimpey’s revenues and profits for 2023 could be quite a bit lower than they were in 2022.
Factored into the share price?
A lot of the near-term challenges could already be factored into the share price, however.
In a recent research note, analysts at HSBC said that they believe the housing market downturn in the UK is already priced in to housebuilding shares.
Interestingly, the HSBC analysts upgraded Taylor Wimpey shares from a ‘hold’ rating to a ‘buy’ rating.
And they also bumped up their share price target. Their new target is 150p (versus a previous target of 105p), which indicates that they expect the stock to rise from here.
This is certainly encouraging.
Potential dividend cut
On the dividend front, however, the news is less encouraging.
For 2022, Taylor Wimpey declared total ordinary dividends of 9.4p per share, up almost 10% year on year. At today’s share price, that equates to a bumper yield of around 7.6%.
I think the company may struggle to pay that level of dividend this year though.
Currently, the housebuilder is only expected to generate earnings per share of 9.1p for 2023. So, I expect to see a smaller dividend payout.
It’s worth noting that at present, the consensus analyst forecast is for a payout of 8.84p per share for 2023, which translates to a yield of around 7.2% at today’s share price.
But that may be too optimistic, as dividend coverage (the ratio of earnings to dividends) would still be quite low.
Mixed outlook
Overall, there are both positives and negatives for investors to digest here.
On the plus side, there could potentially be share price appreciation on the cards.
However, on the negative side, there could be a lower dividend payout on the way.
Given this mixed outlook, investors may want to consider buying other UK shares as well.
