Taylor Wimpey

Description

One of the UK’s largest housebuilders, with a presence across the country and a good track record of buying strategic land, and profitably building and selling new homes.

The company benefits from a good management team, which has a long track record of demonstrating strong capital discipline and a focus on improving returns. Taylor Wimpey’s long order book and valuable land bank are attractive characteristics, as its prodigious cash generation. The business also has a division operating in Spain, which is small in the context of the group but delivering strong growth.

The business came into being in its current form, in the 2007 merger of Taylor Woodrow and George Wimpey.

Investment case summary

In 2017, an increasingly benign view of the UK’s economic prospects combined with the wider market’s antipathy towards domestically exposed businesses in the aftermath of the EU referendum, created a contrarian opportunity to revisit the UK housebuilding sector for the first time in many years. In doing so, Taylor Wimpey emerged as one of several housebuilders that have looked attractive enough to force their way into the portfolios.

UK housebuilders and the construction industry more broadly, now look poised to benefit from structurally positive fundamental dynamics, in a long-term opportunity underpinned by the public sector. Fixing the UK’s ‘broken’ housing market inevitably means building many more homes and, although some have concerns about valuations, from an affordability perspective, with interest rates at record lows, mortgage repayments represent a much smaller part of take-home pay than is normally the case.

Taylor Wimpey is well-placed to continue to increase the volume of houses it builds, supported by a valuable land bank and a planning system which is, in the words of its chief executive “now more balanced and effective than at any point over the last 30 years”. The company has an explicit strategy to deliver enhanced shareholder distributions over the next five-to-ten years by reducing the length of its land bank to a more appropriate level. As a result, we view it as a high-quality business delivering a very attractive and sustainable income stream. Over time, as the market recognises that this business is nowhere near as challenged by the economic outlook as its share price would imply, we expect it to return to more appropriately attractive valuation territory.

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Fund exposure
Income Focus Fund 4.69%
Equity Income Fund 2.35%

As at 31 October 2018

Segmentation
Geography United Kingdom
Industry Consumer Goods
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

On track

A positive trading statement from Taylor Wimpey this morning confirms that the business is on track to meet full year expectations. The company has reiterated its commitment to return £600m by way of total dividends to shareholders in 2019. This represents a 20% increase on last year and, at the current depressed share price, accounts for more than 11% of the current market cap.

Customer demand for new build homes continues to be robust and the company’s sales rate remains strong and cancellation rates remain low. The number of current sales outlets is slightly lower than expected due to delays in some new openings, but the total order book remains strong, at almost 10,000 homes with a total value of approximately £2.4bn.

Signs of customer caution in the South East of England should not come as news to anyone but, for the country as a whole, demand for new houses continues to be robust, underpinned by low interest rates, decent mortgage availability and the Government’s Help to Buy scheme.

The company is guiding towards broadly flat volume next year but sees the potential for significant growth from 2020 onwards. From our long-term perspective, therefore, with a dividend yield of almost 10%, the shares offer incredible value.

Stephen Lamacraft
13 November 2018

Capital markets day

Taylor Wimpey has today provided a long-term strategy update at its capital markets day, mapping out its priorities and principles for at least the next ten years, and some of its financial goals for the next five years. Highlights include:

  • A step-up in the dividend – Taylor Wimpey has increased its ordinary dividend target from 5% of net assets to 7.5% of net assets which equates to at least £250m per annum (from £150m) – it has also committed to increase its 2019 special dividend by £10m to £350m, and guided towards special dividends at a similar level over the next five years
  • Increased land bank efficiency – reducing the length of the land bank by 1 year to 4.0-4.5 years could release c. £500m of additional capital and reflects the favourable structural changes that have taken place in the land and planning environment
  • Increased financial targets – including a commitment to increase returns on net operating assets and maintain operating profit margins and cash conversion rates at current levels

We view this is a positive update, which represents a clear vote of confidence in the business and its end markets. The ordinary dividend alone was articulated as a new minimum shareholder return for the next 10 years implying a long-term yield of at least 4%, which is sustainable even in a stressed scenario where average selling prices fall by 20% and volumes fall by 30%. In reality, the shortening of the land bank implies an acceleration in volume growth, which reduces the length of the land bank in terms of years of production, rather than a shrinking of the land bank in absolute terms.

Additionally, the company has expressed confidence that the current level of special dividend is sustainable for the next five  years, based on its current expectations. This suggests a total dividend of at least 18p per annum can be expected for the next five years. Based on this, in five years Taylor Wimpey will have returned almost half of its current market capitalisation to shareholders. This long-term dividend commitment is a clear sign of confidence from one of the more cautious CEO’s in the sector.

Alex Correia
15 May 2018

Full year results

A solid set of results from Taylor Wimpey today, with not much in the way of surprises. Trading remains strong, the company continues to experience margin expansion, returns on capital employed continue to improve.

In terms of outlook, the business has seen “solid levels of demand” coming into the spring selling season, and the fundamentals of the UK new build housing market remain strong. Taylor Wimpey is 47% forward sold for 2018, which substantially underpins this year’s forecasts.

The company expects to pay total dividends of c. £500m in 2018, which when compared to its current market capitalisation of £6.1bn, equates to a yield of 8.2%. With over £500m of net cash on its balance sheet already and an expectation that this will grow, there is the potential for additional shareholder distributions in the future.

The long-term investment thesis here is in very good shape.

Alex Correia
28 February 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2018 Woodford Investment Management Ltd.
All rights reserved.

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