Forget buy-to-let! I’d rather buy the Taylor Wimpey share price

Harvey Jones would rather purchase housebuilding stocks like Taylor Wimpey plc (LON: TW) than invest in a tough sector like buy-to-let.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK housing market continues to hold steady despite the growing crisis over Brexit. That’s impressive, given that the housebuilding sector was hit hardest by the shock 2016 EU referendum result. However, I don’t think buy-to-let is the way to play property.

Buy-to-let bother

The Treasury’s tax crackdown combined with tough new regulations on renting out properties makes it more of a faff than ever. As things now stand, I reckon the buy-to-let dream is dead.

Personally, I would rather gain exposure by investing directly in housebuilding stocks. You can buy and sell them in seconds, instead of months, and take all your returns entirely free of tax inside an ISA. Also, you can invest much smaller sums.

That’s not to say housebuilders have given investors an easy ride. For example, FTSE 100-listed Taylor Wimpey (LSE: TW) trades 18% lower than three years ago, even though it has rallied 20% in the last six months.

Telford time

London-focused residential property developer Telford Homes (LSE: TEF) has just reported its full-year results to 31 March and is down 4% despite posting a 12% jump in total revenue to £354.3m.

It has made a “strategic shift towards build to rent developments,” which are less risky and capital intensive, but also have lower margins. This reduced total profit before tax to £40.1m, down from £46m in 2018.

Build and they will rent

Telford has entered into strategic build-to-rent partnerships with Invesco and M&G Real Estate to speed growth in the sector and expects to develop significant pipelines in the coming years. It currently has a development pipeline of 4,900 homes, up from 4,000 last year, with a total gross development value of £1.59bn, up from £1.31bn.

Today, the £220m group proposed a final dividend of 8.5p per share, with the total dividend matching last year’s at 17p. The forecast yield is juicy at 5.6%, with cover of 1.9. Gearing has been cut from 52.5% to 37%. 

With City analysts forecasting a 28% drop in earnings over the next 12 months, I’d advise caution. But the current valuation of 10.6 times earnings is certainly tempting.

Taylor-made

With a market-cap of £5.5bn, Taylor Wimpey is a much larger beast. It’s trading at an even lower valuation of just 8.5 times forward earnings, which reflects concerns about the sector. One worry is the future of the Help to Buy scheme, which underpinned more than half of all newbuild purchases in 2018 and, in some areas, as much as 97%.

Effectively, it’s a Government top-up for the housebuilders. But that ends in 2021 for all but first-time buyers, and altogether from 2023. Endless Brexit uncertainty will also add to investor worries.

Made to order

However, the Taylor Wimpey stock is on the up as the company made a strong start to its new financial year, with strong sales and a healthy order book, which currently stands at £2.40bn, up from £2.16bn in 2018.

The group currently has a forecast yield of a mind-boggling 10.7%, although cover is thin at 1.2. Years of double-digit earnings growth looks set to slow, but they should still climb 2% in 2020.

Housebuilding stocks are risky as UK politics enters unknown territory. But with today’s yields and valuations, I’d pick them over buy-to-let every time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »