I like FTSE 100 companies because they’re large and mature businesses. The size and scope of their operations and the liquidity of their shares typically translate into lower volatility than small-cap and even mid-cap stocks. For someone who doesn’t like large and sudden drops in my portfolio’s value, investing in historically less volatile stocks makes sense for me. FTSE 100 stocks tend to pay chunky dividends. I’m an advocate of dividend reinvestment due to how it can boost my long-term returns, so I like income stocks.
Given my investment preferences, I’m always looking for good, cheap, dividend-paying FTSE 100 stocks. They form the backbone of my portfolio, and I have one in mind to add to it in May.
I’d buy FTSE 100 member Taylor Wimpey
I think Taylor Wimpey (LSE:TW) shares are a bargain. They trade at a forward price-to-earnings ratio (P/E) of 6.4. That P/E is low both for the industry and the broader market. The trailing 12-month dividend yield for the stock is 6.6%. Dividends are expected to rise, with forecast yields of 7.53% and 9.25% in 2022 and 2023, respectively. These yields are excellent compared to its peers and the FTSE All-Share. The dividend is forecast to be covered two times by earnings in 2022 and 1.7 times in 2023. This suggests a degree of dividend safety to me.
The Taylor Wimpey share price has been falling since April 2022. The low P/E is, in part at least, a symptom of this decline. So, I have to ask: is this an unloved FTSE 100 stock that’s actually cheap if whatever has been ailing the company can be reversed? Or is it one for me to avoid?
The pandemic did knock Taylor Wimpey’s revenues from £4,341m in 2019 to £2,790m in 2020. But they bounced back to £4,285m in 2021, and analysts have pencilled in rises in 2022 and 2023. Taylor Wimpey has made an operating and net profit since 2016 at least. Although free cash flow per share turned negative in 2019, it did recover quickly. Also, the company usually is cash generative.
The Taylor Wimpey share price looks cheap
The company needs a buoyant housing market to perform in line with expectations. According to the latest trading update, management believes the UK housing market is healthy. Customer demand is strong, and mortgage availability is good, despite the increase in interest rates from 0.5% to 0.75%.
The March 2022 Royal Institution of Chartered Surveyors (RICS) UK residential survey reveals a similar story. Buyer demand and sales rose moderately in March 2022, house price growth is firm, and this is expected to remain the case in the near term. The RICS does caution that rising living costs and anticipated interest rate hikes are spooking its members.
There are, of course, reasons why the housing market, and thus the fortunes of Taylor Wimpey, might falter. But at this price and with this dividend yield, I believe there’s a reasonable margin of safety on Taylor Wimpey stock, and I would add it to my portfolio this May.