A number of UK shares come with big dividend yields. But at 9.8%, Taylor Wimpey (LSE:TW) is right up there with any of them.
Warren Buffett’s firm just bought a housebuilder. So should investors on this side of the Atlantic consider doing the same?
Why is the dividend yield so high?
Let’s start with that 9.8% dividend yield. Such a high yield can often be a warning sign, but Taylor Wimpey is an unusual business.
Most companies base their shareholder returns on their cash flows. The more they make, the more they return to investors.
Taylor Wimpey, however, focuses on its assets. It looks to distribute 7.5% of its assets to its owners each year.
That’s why the dividend has been one of the most resilient in the industry. In a slow property market, assets hold up better than cash flows.
There is, however, a catch. A company can only pay out more than it brings in for so long before it starts to run into difficulties.
Indeed, Taylor Wimpey has announced that it’s going to lower its dividend. But it’s not quite what investors might have been expecting.
What’s changing?
In recent years, investors haven’t been impressed by Taylor Wimpey’s durable dividend. A falling stock price has largely offset the return.
Investors have seen current assets falling and reflected this in the share price. So I’m not surprised to see the firm making a change.
Interestingly, though, the company isn’t changing its policy of returning 7.5% of its assets. Instead, it’s changing the way it returns this.
The company is shifting to a mixture of dividends and share buybacks. And with the stock down, that makes a lot of sense.
That means the dividend will be lower. But a lower share count should help reduce the extent to which each share becomes less valuable.
I think the idea is a step in the right direction. Fundamentally, however, the company needs to find a way to bring in more money.
Is now the time to buy?
The time to buy cyclical businesses is when they’re out of favour. And Berkshire Hathaway is making moves in the US.
A tough housing market is weighing on share prices across the Atlantic. But there are also issues closer to home.
In the UK, housebuilders are dealing with a tough situation. There’s a mixture of oversupply and affordability issues.
That’s clearly a challenging environment. But it might be an opportunity to take advantage of low valuations across the industry.
A year ago, £1,000 bought 884 shares in Taylor Wimpey. Today, that same cash outlay gets an investor 1,284 shares.
There’s no doubt the stock is a lot cheaper. But is it the best name in the industry to consider right now?
Here’s what I’m thinking
I think this might be the best time to look at Taylor Wimpey shares in a long time. But it’s not my top pick for the housing industry.
The firm’s shareholder return policy makes me wary. Its dividend has been more reliable, but that comes at a cost.
I’m not clear that the firm has a long-term advantage when it comes to bringing money in. And that’s why I’m looking at other opportunities.
Stephen Wright owns shares in Berkshire Hathway.
