I imagine there would be many investors that would be wary of the property and construction industry. And they would have every reason to be. However, I do believe the Taylor Wimpey (LSE: TW) share price is worthy of careful consideration. To my mind further downside is limited, but potential upside could be substantial.
Headwinds abound
To be clear, there is little by way of positive news in the housebuilder sector. It is important to summarise some of the many factors that are reflected in share price’s poor performance.
Construction costs are rising. Supply chains are still not back to their usual pre-pandemic efficiency. Raw materials such as lumber, bricks and cement remain at elevated prices. Material cost increases of up to 24% are quoted by the industry.
This is further exacerbated by shortage of labour, skilled and otherwise. This drives up wages as well as delaying completion dates, which can carry financial penalties.
On the demand side, we see a customer base that is reluctant to commit to more expensive mortgages on account of rising interest rates and a general inflationary increase in the cost of living. The ability to pass on increased costs to the customer is therefore limited.
Any bright spots at all?
The main consideration here is that most of these threats to the industry have already been priced into the share price. Therefore, I am taking the view that any possible improvement in economic conditions, however fleeting, should be immediately reflected in a rising share price. What that might be is harder to quantify. It could potentially be a slowing or even a stall in interest rate rises or inflation. Or a softening in commodity prices, for example.
Should that occur, I believe Taylor Wimpey is well positioned to benefit. Its cash position, for instance, is strong. Consequently, it has the necessary reserves to add to its landbank at more competitive prices when the opportunity presents.
An income favourite
I believe that the most compelling argument for Taylor Wimpey’s future performance is that it is already a favoured income stock. Its declared interim dividend of 4.62p is up 8% from last year.
With a healthy dividend cover of 2.10, there is more than sufficient cash flow in the company to cover these dividends. Additionally, with a present inflation-busting dividend yield of 9.22%, I am going to assume this stock is going to be on many investors’ shopping lists.Â
Therefore, my hypothesis is that as soon as we see some economic tailwinds, Taylor Wimpey will be one of the main beneficiaries of new funds flowing into a revitalised housebuilding sector. As such, I think it is time to commit some of my funds to this stock. And perhaps add further on any evidence that the current economic malaise may be changing for the better.