Taylor Wimpey (LSE: TW) shares are the biggest surprise in my portfolio. Unfortunately, they’re an unpleasant surprise.
I snapped them up in 2023, when they looked dirt cheap, trading at just six or seven times earnings and yielding almost 7%.
Pretty quickly, I was sitting on a 40% gain and slapping myself on the back. Turned out I’d punched myself in the face. The share price is down 18% over the last 12 months.
Most of the damage came in the second half of 2024, when it became clear that interest rate cuts weren’t arriving as quickly as hoped. The theory was that lower rates would cut mortgage costs and boost demand for property, while also making dividend stocks like this more attractive relative to cash and bonds.
Value stock
So far, that scenario hasn’t played out. Yes, the Bank of England has trimmed rates four times since last August to 4.25%, but inflation is sticky. This stopped the Bank of England from cutting rates again yesterday (19 June).
The UK property market remains sluggish. Nationwide said prices rose 0.5% in May, putting annual growth at 3.5%, but it’s hardly a boom. Buyers raced to beat the end of the stamp duty holiday in March, but momentum has faded since.
Meanwhile, economic growth forecasts are being cut and there’s talk of fresh tax rises in the autumn. That won’t do much to lift consumer confidence.
Taylor Wimpey’s latest update on 30 April offered some reassurance. The spring selling season was progressing well and full-year guidance was unchanged.
Management expects full-year completions to hit 10,400 to 10,800 and is guiding for around £444m in profits. Not bad given the wider picture. But not enough to fire up the share price.
Dividends doing heavy lifting
I’m down about 6% on my shares, but once dividends are factored in, I’m slightly ahead. The trailing yield is currently 7.99%, among the highest on the FTSE 100.
Over the last decade, dividends have increased at a compound average of nearly 20% a year, although it’s been more of a bump than a climb lately. The total dividend rose just 1.9% in 2023 to 9.58p per share, and was cutl 1.25% in 2024 to 9.46p.
Still, that income helps cushion the volatility, especially with my dividends being reinvested at what I hope is a relatively low price. That’s quietly building my stake for whenever the rebound comes.
There are still challenges. Housebuilding costs remain high, partly due to stubborn inflation. Labour’s hike in employer National Insurance contributions adds another burden. Any further delays to rate cuts could keep sentiment subdued.
That said, the trailing price-to-earnings ratio is modest at 14.2, while analysts have pencilled in a 12-month price target of just under 145p. If that plays out, it would deliver a 22% gain from today. When added to the dividend, it would deliver a total return close to 30%. Time will tell.
Of the 17 analysts covering the stock, 10 rate it a Strong Buy, two say Buy and five say Hold. None say Sell. Investors might consider buying while sentiment remains weak and the yield stays this high. I wouldn’t say it was the perfect recovery stock, but I think it’s pretty close!
