7%+ yield and a booming share price! Should I scoop up Taylor Wimpey shares?
Hunting for attractive income shares I can add to my portfolio, I have been considering the pros and cons of housebuilder Taylor Wimpey (LSE: TW). With a 7.4% dividend yield, the firm might tick the income box. Taylor Wimpey shares have been steadily rising since the end of September. They are up over 40% in that time.
However, that still leaves the shares 20% below where they were a year ago and trading on a price-to-earnings ratio of just 8.
So, could they be a bargain to snap up for my portfolio?
Shifting cash flows
To pay dividends consistently, a company needs to generate excess cash.
Taylor Wimpey has been solid when it comes to profits. In its interim results, profits were flat at the operating level but pre-tax profit rose 16% compared to the prior year period. At £335m, they were substantial.
The cash flow picture was less pretty, however. The period saw negative free cash flows of £193m.
Some £151m of that covered the cost of share buybacks. But even without those, the company did not generate enough free cash flow in the first half to cover its dividend. On a short-term basis that is fine, but over the long term, negative free cash flows can signal a risk that a dividend may be cut.
However, the negative free cash flow at the interim stage may not be a sign of things to come. In 2021, the company generated around £100m in free cash flows even after paying out £300m in dividends. The buyback programme last year exacerbated the negative free cash flows, but that could be a one-off.
The buyback might unlock long-term value for shareholders if the firm was able to buy at a low price and reduce the number of shares in circulation. That could boost earnings per share and also free cash flow per share in future years, setting the stage for dividend increases.
Indeed, at the interim stage the company raised its dividend by 12% compared to the year before. Given its resilient post-tax profit performance, I think the dividend could see further rises in coming years, probably starting with the publication of last year’s final results early next month.
But one red flag at the interim stage was that, even though profits grew, there was a 5.4% year-on-year decline in revenue. If house prices fall, revenues at homebuilders could follow them. That could be bad news for both profits and cash flows. That might lead to a lower payout for owners of Taylor Wimpey shares.
I have to admit, I do like the look of the shares. The business is well-established, it trades on an attractive valuation and has a juicy, growing dividend.
But I remain nervous about the prospects for the housing market. Taylor Wimpey shares have risen sharply, but they are still 35% lower than five years ago – and more than two-thirds below their peak in 2007 before the financial crisis hit. So for now, I will wait and see how the housing market performs in coming months and beyond before making any move.
The post 7%+ yield and a booming share price! Should I scoop up Taylor Wimpey shares? appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
- Should I buy Taylor Wimpey shares for 2023?
- Should I invest more of my cash in these dirt-cheap income stocks?
- Taylor Wimpey shares: my top passive income buy
- 3 FTSE shares I’d buy right now
- Forget Bitcoin! I’d much rather hold top dividend stocks like these 2
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.