House prices have lost 3.5% in the year to June, the biggest dip since 2009. So Taylor Wimpey (LSE: TW.) share price falls makes sense and it’s a stock to sell, right?
Mortgage pain?
Some might think so. After all, interest rates are at their highest for 15 years.
But though house prices are down, Nationwide says the demand for mortgages is holding up. Mortgage payments now take up nearly 40% of average take-home pay, up from 30%. But buying a home has been a key desire for Britons for decades.
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Maybe a few more months of higher mortgage costs is worth it if we can buy a house for 3.5% less now? I mean, our purchase price will be fixed forever, and interest rates will surely go down — maybe even before the year is out.
Taylor Wimpey
The last update we had from Taylor Wimpey was in late April. Then the company spoke of “continued recovery in demand from the low levels experienced towards the end of 2022“.
That was a while ago, before the most recent woes. And since then, the Taylor Wimpey share price has turned down again.
H1 results are due on 2 August, so not too far away now. And I reckon they could mark a turning point. That is if investors can see through the short-term storms and get a glimpse of long-term sunshine.
What are the reasons for being optimistic, or pessimistic?
The dividends
I reckon they’re two aspects of the same thing, dividends. Forecasts put Taylor Wimpey on a dividend yield of 9.3% this year. But I fear that might not happen, and we could see the cash pared back.
The Persimmon forecast has already been reduced, and we could see others do the same. Persimmon, though, was paying back a lot of surplus cash as dividends. And it’s the end of that, at least for now, that led to the downgrade.
Still, H1 results across the industry could mark a bit of a crunch. And if dividend expectations are lowered, share prices could head south again.
Some folk right now expect interest rates to reach as high as 5.75% before they start to fall back. And I just can’t see that happening without hitting the housing market quite hard.
Cash cow
But the dividend is also my reason to buy. Taylor Wimpey is the UK’s second-largest residential property developer by revenue. And it has its fingers in the whole chain, from land banking and development all the way to sales and marketing.
I rate that as a pretty good defensive moat.
The company is also one of the UK’s best long-term cash cows, I’d say.
So that gives us a business serving a chronic supply shortage, and in very high demand. Add to that its cash generation prospects and a solid margin of safety. And I make it a buy.
If investors can see the long-term outlook for dividends, and look past the 2023 threats, I think Taylor Wimpey shares could end 2023 ahead of where they are now.
