I bought Taylor Wimpey (LSE: TW) shares twice in September, only to watch them plunge 12%. They looked so cheap after that, I bought them again in November. Later that month, I received my first dividend and reinvested it straight back into the stock.
I invested a modest £4,077 in total and I’m sitting on a gain of 20.66%, or £842. My stake is worth £4,919 but these are early doors. Like all the stocks I buy, I hope to hold Taylor Wimpey for a minimum of five to 10 years, and ideally a lot longer than that.
I’ll continue to reinvest all the dividends I receive, which should build my stake if they continue to roll in (no guarantees, as ever). I’m hoping for some capital growth along the way, if the share price continues to recover (again, no guarantees).
I’d call this a good buy, so far
Over 12 months, Taylor Wimpey shares are up 36.02%, but they’re down 2.05% over five years. The stock has got a long way to go recover its lost value.
I decided UK housebuilders looked undervalued ever since they crashed 40% after the shock Brexit vote in 2016. Yet they continued to struggle even as property prices flew to new highs.
I didn’t quite understand this. Given property shortages, low interest rates and rising prices, I thought they should do much better. Plus they paid super dividends.
Last summer, I saw an opportunity looming. Investors were still down on housebuilders, as interest and mortgage rates rose. Yet I decided the panic had been overdone. Although first-half profits had tumbled 29% to £237.7m, Taylor Wimpey retained a robust balance sheet with net cash of £654.9m, up from £642.4m a year earlier.
When I bought Taylor Wimpey, it was forecast to yield more than 8%. I was a little concerned by dividend cover, which looked thin and still does. It has halved from two to one.
Happy to hold for years
Consensus suggests the dividends are safe, but unlikely to grow much. The forecast yield is a solid 6.43% in 2023 and 6.3% in 2024. I can live with that. Those yields are based on a higher price than I paid.
Taylor Wimpey shares are more expensive than they were. I bought them at less than six times earnings. Today, they trade at 7.8 times. That’s still cheap though.
Much now depends on the outlook for interest rates, just as it did last year. If rates continue to fall, and the Bank of England isn’t too far behind the curve, my Taylor Wimpey shares could climb higher. New mortgage rates are already below 4%, so fingers crossed.
However, if inflation shoots up, say, because of problems in the Red Sea, Taylor Wimpey shares will be vulnerable. Investors could lose faith and my gains could quickly reverse. Investors will react badly if today’s positive expectations are dashed.
If I didn’t own the stock, I’d buy it today. I do own it though, and I’m happy to hold what I’ve got. I’ll leave my shares to quietly do their thing, and look for the next bargain stock.
There are plenty more cheap FTSE 100 shares that I’d like to buy today.
