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Since 19 September, housebuilder Taylor Wimpey (LSE: TW) has seen its share price fall by over 30%.
Why have the shares slumped? One obvious explanation might be that the FTSE 100 company’s trading has disappointed investors. But this hasn’t happened.
Trading as expected
Taylor Wimpey’s recent 2024 trading update confirmed that profits for last year should be “in line with previous guidance”. And 2025 seems to have got off to a reasonable start too. Taylor Wimpey’s order book stood at £1,995m at the end of December, 12.5% higher than the £1,772m reported at the end of 2023.
The company expects to report an increase in completions this year – although weaker pricing in the South of England does mean that the average house price in the order book is 0.5% lower than last year.
This might be one reason for the recent weakness, but this update was only issued on 16 January 2025. It doesn’t explain last year’s slump.
Market headwinds?
My guess is that investors were hoping the government would include some kind of cash bung to boost housing activity with the autumn Budget. Investors may remember how the Help to Buy scheme turbocharged house prices for several years. As it happens, the only promise we’ve got from the government so far is that it will try to unclog the planning system.
One other potential headwind is that interest rates aren’t falling as fast as expected. This has a direct impact on mortgage rates and affordability. That raises the risk of further pressure on house prices.
Is the 8% dividend yield safe?
I think this is a good example of the old stock market adage “buy the rumour, sell the news”.
Shares in Taylor Wimpey and other housebuilders performed very well ahead of October’s Budget. But when the actual news emerged (there wasn’t any), investors took profits. This sell off has left Taylor Wimpey shares trading slightly below their June 2024 book value of 125p. That’s a traditional sign of value for a housebuilders.
I’m also tempted by the 8% forecast dividend yield. However, I’m a little concerned that the forecast payout of 9.4p isn’t fully covered by expected 2024 earnings of 8.2p.
Taylor Wimpey ended last year with net cash of £565m and could probably afford to maintain the dividend. However, management won’t necessarily want to do this. It may want to preserve cash so that it can expand its build rate if market conditions improve.
What’s more, CEO Jennie Daly already has a get-out-of-jail-free card for a dividend cut. Her previous guidance on dividends implied that the payout could fall to a minimum of 7.1p per share, if needed. That would give the stock a more normal 6.1% yield.
My verdict
Right now, I’m on the fence about Taylor Wimpey. I think there’s a chance the stock’s become attractively valued. But I don’t feel it’s definitely too cheap to ignore. I’m also slightly worried about the safety of the dividend.
For these reasons, I’m going to wait until the company’s results are published in February before revisiting this situation.
