The UK stock market has struggled to find direction in recent days in the wake of troublesome economic forecasts. Nevertheless, one company’s update offered some relief from the doom and gloom, making it my stock of the week.
Profit jumps
Housebuilder Taylor Wimpey (LSE: TW) shares soared on Wednesday following the release of a positive set of half-year numbers.
Hailing an “excellent” performance, the FTSE 100 giant reported a 16.3% jump in pre-tax profit to £335m from the same period in 2021. Although down on the previous year, home completions — at 6,790 — were also “slightly ahead of guidance“.
All this is impressive, considering the industry has faced cost pressures as well as the end of the stamp duty holiday brought in during the pandemic.
Ahead of expectations
Can last week’s momentum continue? It’s certainly not impossible.
New CEO Jennie Daly is (understandably) bullish, commenting that “housing market fundamentals remain positive, supported by an enduring supply and demand imbalance and good availability of
attractively priced mortgages.”
She went on to add that demand for Taylor Wimpey’s homes “remains strong” and that the company boasted a “sector-leading landbank.” With an order book now standing at £2.8bn, the numbers help to back this up.
Perhaps, most notably, the company announced that group operating profit for the year was now expected to be “around the top end” of the current consensus among analysts. At a time of seemingly non-stop economic misery, this all sounds pretty good to me.
Risks to consider
While last week’s update was encouraging, it’s important for me to remain aware of the risks of buying Taylor Wimpey shares — or those of any other listed housebuilder — now. My stock of the week doesn’t necessarily become my ‘stock of 2022’.
A slowdown in the UK economy and climbing interest rates could temporarily impact the number of people looking to buy properties for a while. This could dent investor sentiment too. In times of trouble, a rotation into more defensive/less cyclical shares feels prudent. Capital preservation arguably becomes more important than making capital gains.
All in the price?
Despite this, how much of this is priced into Taylor Wimpey’s shares? I think quite a lot. After all, nothing I’ve said above is revelatory. The housing market has been hot since the pandemic and we now know a protracted recession looks likely.
Having dropped almost 30% in 2022, as I type, the stock also changes hands at a price-to-earnings (P/E) ratio of less than seven. That’s already low, even if those earnings do need to be revised down later in the year.
Big dividends
While last week’s gains might end up being lost, the dividend stream still feels pretty safe.
Taylor Wimpey shares yield a chunky 7.7%. Such a big dividend would normally be a red flag for me. Unless we see the mother of all earnings revisions however, payouts look likely to be easily covered by profit. This would mean more cash for me to re-invest, ultimately leading to my wealth compounding in value.
I’ve previously given the housebuilders a wide berth. However, I must say that I’m strongly considering starting a position here.