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Taylor Wimpey - full year guidance unchanged but profits down

Nicholas Hyett | 31 July 2019 | A A A
Taylor Wimpey - full year guidance unchanged but profits down

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 118.55 | Buy: 118.65 | Change -3.80 (-3.09%)
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Taylor Wimpey saw first half operating profits fall 9.4% to £311.9m. That reflects higher build costs, and tougher trading in London & the South East.

An interim dividend of 3.84p is 57% ahead of last year. A special dividend of £360m, which is around 11p per share, will be paid in July 2020.

The shares were down 4.4% following the announcement.

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Our view

Taylor Wimpey has been making hay while the sun shines in recent years, but clouds are gathering over the UK housing market. Transaction numbers are down, and prices are stagnating. Brexit stockpiling and exchange rate headwinds have pushed up the cost of construction materials too.

That's not great news for Taylor Wimpey.

The housing market in London and the South East has been sluggish, and the region has higher construction costs too. Taylor's particularly significant exposure means the combination presents a perfect storm of extra expense and fewer pennies to compensate.

It doesn't help that other tailwinds are running out of puff. Help to Buy is ending in 2023 and the proportion of sales supported by the scheme is still rising. It was attributable to 40% of sales at the last count. That will leave quite a hole to plug in a couple of years.

Several of the fundamental factors driving the UK housing market in recent years remain in play though. Brits are ideologically committed to home ownership and the country still faces a major housing shortage. Interest rates are still incredibly low by historical standards, so mortgages remain cheap. Housing demand looks unlikely to disappear altogether.

Taylor Wimpey's also in better condition than in the past, with a £300m cash pile on the balance sheet. It's worth keeping an eye on the land creditor position though, with over £700m being owed. Still, Taylor has demonstrated good strategic planning. It's working hard to improve the way it acquires and uses land. Instead of throwing up houses where it can, Taylor's discerningly chosen to use more large and 'super large' sites going forwards, which makes a lot of sense from a margin perspective.

The final silver lining is near-term plans to increase the dividend remain unchanged, with £600m earmarked as shareholder returns this year. The prospective yield is 10.3% next year, although some of this is coming from special dividends, which could be cut if conditions get tougher.

Overall, Taylor Wimpey has done well and thrived while conditions have been favourable. The fact remains though that while political uncertainty lingers, the potential for economic upset is potentially lurking round the corner, and that could knock a more substantial hole in Taylor's profits.

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Half Year Results

Group revenues reached £1.7bn, which is 0.8% ahead of the same time last year. That reflects a 1% rise in completions to 6,432, as well as a 1.6% improvement in average selling prices, which is now £261,000.

Build costs increased by 6.1% due to material inflation. Paired with a greater proportion of completions in the London and South East Division, operating margins dipped from 20% to 18%.

The current order book - excluding joint ventures - is worth £2.5bn, compared to £2.3bn this time last year, and around 87% of private completions for this year have been forward sold. Each of the group's 257 outlets sold roughly one property a week during the half, a 20.5% improvement.

Taylor continues to see good opportunities in the land market, and the short term landbank now equates to around 5.1 years' supply. The current landbank includes 91 large and 'super large' sites, which reflects Taylor's strategic efforts to use a higher number of bigger plots.

Net cash fell to £392m, from £644.1m during the half. That was mostly driven by investment in land and work in progress, which is a function of the increased order book.

The group expects full year results will be in line with expectations. While volumes are set to increase year-on-year, flat pricing and continued build cost pressures means margins are expected to be lower than last year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.