On Wednesday, British homebuilder and FTSE 100 stalwart Taylor Wimpey (LSE:TW) announced a 16% increase in pre-tax profit to £334.5m for the six months of the 2022 financial year. Taylor Wimpey’s strong performance arrives against a backdrop of an economy teetering on the brink of recession, which just goes to show that the UK property market stays winning in my opinion. Having said that, Taylor Wimpey shares are down approximately 30% so far in 2022, with investors concerned about rising costs, labour shortages and supply chain delays in the construction sector.
But, at the current price of £1.26, I believe this stock is undervalued compared to its historical average, and I’ll be investing in Taylor Wimpey shares for the following reasons.
Recession-proof?
No industry is guaranteed to be recession-proof. But the fundamentals are looking good at the moment for the housing market.
According to statistics from Nationwide Building Society, UK house prices increased by 0.1% month on month in July – making it the 12th consecutive monthly increase, albeit at a lower rate than previous growth.
Prices are continuing to go up based on strong demand. Taylor Wimpey’s chief executive Jennie Daly thinks so as well: “Demand for our homes remains strong,” she said in Wednesday’s statement.
However, one factor that could impact demand is the imminent disbanding of the UK government’s popular Help to Buy scheme for new builds, which accounted for 36% of Taylor Wimpey’s completions in 2021.
Recognising this potential headwind, the firm stated that there remains good availability of attractively priced mortgages in the market. Until a replacement scheme is devised, however, first-time buyers will likely have to wait longer to sign on the dotted line.
An efficient homebuilder
Taylor Wimpey’s completed homes in the first six months of 2022 came in ahead of guidance at 6,790. This demonstrates an efficient homebuilding operation, given the challenges facing the sector.
In addition, the company said it expects a full-year financial performance towards the top end of current City forecasts, indicating that there could be further positive returns further down the line.
“We continue to expect low single digit year-on-year growth in UK completions for 2022 and our margin guidance remains unchanged,” Taylor Wimpey said.
The board also proposed an interim dividend of 4.62p in yesterday’s statement, which is up 8% on last year and another reason why I’ll be buying up Taylor Wimpey shares.
With a prospective dividend yield of 9.1% for the next 12 months, stockbroker Hargreaves Lansdown argues that there’s more than enough cash flowing through the business to cover its dividend payments.
Investors are also more likely to receive a base level of dividend even in a downturn, due to Taylor Wimpey’s dividend policy linked to asset value, rather than earnings, according to Hargreaves Lansdown.