Taylor Wimpey (LSE:TW) shares have experienced a large fall this year. Year to date, they’re down about 50%. Is it worth snapping up a few shares in the UK housebuilder for my portfolio after the big decline? Let’s take a look.
The shares look cheap
Taylor Wimpey shares certainly look cheap at current levels. Right now, City analysts expect the group to generate earnings per share of 19.4p for 2022. This means that at the current share price of 88.5p, the forward-looking price-to-earnings (P/E) ratio is under five, assuming earnings actually come in at this level (more on this below). That’s well below the average FTSE 100 P/E ratio.
Huge dividend yield
Meanwhile, after the recent share price fall, the stock now sports a monster dividend yield. At present, analysts expect Taylor Wimpey to pay out 9.3p per share in dividends for 2022. That translates to a yield of about 10.6% at today’s share price.
Too good to be true?
The thing is though, if a stock looks too good to be true, it often is. And I suspect this could be the case here.
Taylor Wimpey is facing some major challenges right now. With economic conditions deteriorating and interest rates rising rapidly (five-year mortgage rates have jumped from under 3% a few months ago to around 6% today), the outlook for housebuilders is very uncertain. This backdrop could potentially lead to a sharp drop in demand for housing, as well as lower house prices, which could impact Taylor Wimpey’s revenues and earnings (and send the share price lower).
It’s worth noting that last month analysts at Berenberg said that they expect 2023 to be the toughest operating environment for the UK housebuilding industry since the Global Financial Crisis (GFC) of 2008/2009. Meanwhile, analysts at HSBC said they expect a 20% slump in UK housing demand for a year from this autumn.
Given the backdrop, I think there’s a real chance that Taylor Wimpey’s revenues and earnings could fall short of analysts’ expectations this year and next. So the stock may not be as cheap as it appears to be.
Dividends too could fall short. In economic downturns housebuilders have a habit of cutting or canceling their dividends. We saw this during the GFC and we also saw it during the early days of the Covid pandemic. So I would take the massive yield here with a grain of salt. If earnings are weaker than expected, the dividend payout could be significantly lower than expected.
My move now
Weighing up the low valuation and the high yield versus the risks, I won’t be buying Taylor Wimpey shares for my portfolio. For me, the level of uncertainty here is too high.
In the current environment, I’m going to focus my attention on companies that have dependable revenues, cash flows, earnings and dividends.