Shares in FTSE 100 housebuilder Taylor Wimpey (LSE: TW) are down 22% from their 20 September traded high of £1.69.
This was part of a broader fall in stock prices in the sector, which saw activity drop as UK interest rates spiked from 2021. The cost-of-living crisis further dampened the housing market and housebuilders’ share prospects with it.
However, the Bank of England cut interest rates in August for the first time since March 2020. The Bank cut them again on 7 November, prompting optimism from some that the UK housebuilding market may soon improve.
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These cuts followed the bullish pledge by the new government to build 300,000 new homes yearly for five years.
How does the core business look?
Indeed, Taylor Wimpey said in its 7 November trading update that the second half of this year’s outlook has improved. The chief reason it cited is lower mortgage rates reducing affordability concerns among homebuyers.
It added that the net private sales rate per outlet per week over the third quarter was 0.7 homes. This was up from 0.51 units over the same period last year.
Moreover, its order book as of 4 November was around £2.2bn, against £1.9bn last year.
Consequently, it expects to deliver the upper end of its 9,500-10,000 homes building guidance this year.
Is the stock undervalued?
Given these figures, consensus analysts’ forecasts are that the company’s earnings will increase a whopping 17% a year to end-2026. And it is growth in earnings that ultimately power a firm’s share price and dividend higher.
The major risk here in my view is a resurgence in inflation that could prevent further interest rate reductions.
However, as it stands, Taylor Wimpey shares look a potential bargain to me. A discounted cash flow analysis using other analysts’ figures and my own shows they are 38% undervalued at £1.31.
Therefore, as fair price is £2.11, although market unpredictability could push them lower or higher than that.
A high-yield bonus in the shares
The total dividend paid by the stock last year was 9.58p, which yields 7.3% on the current share price.
Analysts forecast the payout will rise to 9.8p in 2025 and to 9.97p in 2026. These would give respective yields on the present stock price of 7.5% and 7.6%.
By contrast, the average yield of the FTSE 100 is just 3.6% and of the FTSE 250 only 3.3%.
Will I buy the stock?
The high yield is tempting for me, as I focus on such shares that generate good dividends. This is so I can increasingly live off the income generated and further reduce my working commitments.
I also think there is plenty of room for the share price to rise over time, driven by earnings growth.
That said, UK governments have been pledging to dramatically increase housebuilding for years. And not one of them has come anywhere near the 1.5m total over five years that the new government promises.
Consequently, as I already own several high-yielding stocks, I will wait to see if this government does what it promises.
