Taylor Wimpey (LSE:TW) shares haven’t done well over the last 12 months. The stock is down 9%, while the FTSE 100 has gained 2.5%.
Going forward, there’s a risk the housing market might be weak for some time. But the question for investors is whether the business can do well enough when things improve to make up for the downturns.
10-year returns
A decade ago, £1,000 would have bought me 928 Taylor Wimpey shares. Today, that investment would have a market value of £981.
The share price is slightly lower than it was 10 years ago. But just looking at the share price doesn’t account for the dividends I’d have received since then.
Since 2013, Taylor Wimpey has distributed 41p per share in dividends. With 928 shares, I’d have received £380 in passive income.
That would take my total return to £1,361 – a 3% average annual return. This isn’t particularly impressive, but this measurement is disproportionately impacted by the recent fall.
Business ups and downs
Over the last decade, Taylor Wimpey has had its share of both challenges and tailwinds. And this has shown up in its financial performance.
As the UK fell into recession in 2020, the company suspended its dividend. But the following year, an economic recovery saw earnings per share more than double and the dividend restored.
The long-term trend, though, has been positive. Revenues have grown at an average of 6.5% per year and operating margins have increased, causing operating income to more than double.
In other words, the share price might be where it was 10 years ago, but the underlying business looks like it’s in much better shape.
Outlook
A price-to-earnings (P/E) ratio of six with a dividend yield of 8.5% indicates investors think the company’s earnings will prove unsustainable. And there’s some justification for this.
A report from the Office for National Statistics this week indicated that GDP declined in May. On top of this, interest rates look set to reach 6.25% by the end of this year.
Taylor Wimpey itself has announced that completions this year are likely to be down 30% compared to last year. And there’s similar sentiment from elsewhere in the industry.
Persimmon stated that forward sales for this year are down by more than a third. And brick company Forterra is expecting subdued demand to last for longer than previously anticipated.
A stock to buy?
In summary, the outlook is gloomy for the housebuilding sector and Taylor Wimpey isn’t immune from this. But is excessive pessimism and a falling share price creating a buying opportunity?
I think so – at the moment, the company’s market cap is £3.68bn. Earnings are clearly coming down from their current levels, but even at 2020 levels, today’s price represents a P/E ratio of 17.
For a cyclical business in unfavourable conditions, though, I see this as a good price. A more enterprising investor might wait for news of a dividend cut, but if I had cash available, I’d buy the stock today.
