Taylor Wimpey‘s (LSE:TW) share price has risen in value over the past 12 months. Yet at current prices of 109.7p per share, the FTSE 100 firm still looks like an attractive way for investors to make a winning second income.
Recent troubles in the UK housing sector have been well publicised. A combination of rising interest rates and growing unemployment suggests conditions could get much worse in 2024 too.
But Taylor Wimpey has continued to raise dividends, despite the uncertain outlook. Does this suggest that worries over the company’s dividend prospects for the short-to-medium term are overblown?
Dividends still rising
As with all of its industry rivals, trading at the business has worsened significantly as buyer affordability and confidence has tanked. Sales and pre-tax profits here dropped 21.2% and 28.9% respectively during the half-year to 2 July. Over the period, its weekly average sales declined to 0.71 from 0.9 a year earlier.
On the plus side however, completions topped the firm’s forecasts, and Taylor Wimpey said in August it expected full-year completions to range at the upper end of its guidance (at 10,000-10,500 homes).
This encouraged the builder to boost the half-time dividend to 4.79p per share from 4.62p a year earlier. At the time, the company described itself as “a strong, sustainable and agile business underpinned by a robust balance sheet and an excellent landbank“.
Freeze in store?
City analysts don’t expect dividends to continue marching higher though. In fact, they predict the full-year reward will remain locked at 2022’s level of 9.4p per share for the next two years.
But of course, these payouts still result in a mighty 8.6% dividend yield. And as the business has noted, it has a strong balance sheet that could help it continue paying large dividends in line with its payout policy. The business seeks to deliver dividends equivalent to “7.5% of net assets, or at least £250m” through the current cycle.
Taylor Wimpey’s net cash improved 1.9% year on year to stand at £654.9m as of June. It’s targeting a cash balance in the range of £500m-£650m at the year’s end.
Red flags
However, I believe the scale of Britain’s housing market cooldown casts a shadow over those dividend and cash goals.
Latest Bank of England data this week showed net mortgage approvals slumped to 43,300 in September. This was the lowest number since January and reflects a further deterioration in homebuyer interest. And things threaten to get even uglier in the months ahead.
Worryingly, the full-year dividend City analysts expect in 2023 is higher than anticipated earnings of 9.2p per share. And this remains the case for 2024 (earnings per share are tipped to recede to 9.1p then).
This clearly leaves little wiggle room for the company to meet current dividend forecasts. There’s a danger that profits estimates could be cut back too, when the FTSE firm’s next trading statement on 9 November is released.
I plan to continue holding the Taylor Wimpey shares I already own. This is because the long-term outlook for the business remains robust. But right now, I’d rather buy other UK shares for dividend income in the short-to-medium term.
