Shares in housebuilder Taylor Wimpey (LSE: TW) have fallen since Wednesday, when the FTSE 100 firm sold £500m of new shares. Taylor Wimpey’s share price is now down by nearly 40% from the highs seen in March.
Should you be buying back into this stock ahead of the crowds, or is it time to take a more cautious approach? I’ve been taking a closer look.
Why does this builder need more cash?
Taylor Wimpey says that it wants the extra cash to take advantage of low prices in the land market. According to the firm, previously-agreed deals with other buyers are falling through. Attractive land is coming back on the market at lower prices.
Buying land at times like this can lay the foundations for very profitable future developments. I don’t have a problem with this. I’m also encouraged to know that the firm has seen a strong surge of interest since reopening its show homes after lockdown.
I don’t think Taylor Wimpey is likely to run out of cash, but I am a bit disappointed that this fundraising has become necessary.
Why the Taylor Wimpey share price is falling
I don’t think this company’s financial management has been particularly good for shareholders.
Since January 2012, Taylor Wimpey has paid out £2.3bn in dividends. The company’s net cash balance is now down to just £6.4m, even though £485m of dividend payments planned for this year have already been cancelled.
This might still be a reasonably strong position, except that the firm also owes £650m to land creditors – people who’ve sold development land to Taylor Wimpey on credit.
If we add this obligation to the group’s net cash balance, it becomes a net debt of around £644m. According to management, £125m must be paid to land creditors in 2020, with a further £270m due in 2021.
It’s now clear to me why the company has had to ask shareholders for cash. Without taking on a significant amount of new debt, Taylor Wimpey might not be able to pay its existing land creditors and fund new land purchases.
Here’s what I’d do now
In more normal times, a big housebuilder might borrow money to fund land purchases. The fact Taylor Wimpey isn’t borrowing anymore money suggests to me that banks won’t lend – or that management is preparing for a more serious downturn.
Housebuilders have enjoyed a decade-long boom, fuelled by cheap mortgages and the government’s Help to Buy scheme. Profits have hit record levels. But I think Taylor Wimpey has been too generous with its shareholder returns. Paying smaller dividends would have enabled the group to reduce its land creditor balance and build financial reserves.
This hasn’t happened, so loyal shareholders are now having their holdings diluted. Each Taylor Wimpey share will now attract a smaller share of future profits (and dividends).
At about 145p, Taylor Wimpey shares trade on about 10 times 2021 forecast earnings. That may seem cheap, but I think the outlook is likely to worsen over the next six months. I expect profit forecasts to fall.
I think it’s also worth remembering that Taylor Wimpey’s 145p share price is still around 1.5 times its net asset value. In a falling market, that’s not cheap enough for me to be interested. I plan to stay away from this stock for now.