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Taylor Wimpey - higher costs put pressure on margins

Nicholas Hyett | 13 November 2019 | A A A
Taylor Wimpey - higher costs put pressure on margins

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 162.75 | Buy: 162.85 | Change 1.20 (0.74%)
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Taylor Wimpey is on track to meet overall full year targets, although with greater volume and lower margins than previously expected.

The group confirmed its intention to return around £610m to shareholders in 2020, up £10 million on 2019.

The shares were broadly flat 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. Those using the scheme accounted for 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 10.8% next year, although a large chunk of this is coming from special dividends, which would be first in the firing line 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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Third Quarter Trading details

Average sales per outlet per week were 0.92 in the second half of the year, compared with 0.77 in 2018, although there is some increased customer caution in the higher-priced London and South East. The group operated out of an average of 252 outlets in the year to date, down slightly from 274 in 2018, but consistent with the group's strategy of optimising larger sites.

The total order book, excluding joint ventures, represents 10,433 homes, worth approximately £2.7bn and 12.5% ahead of last year.

The short term landbank stands at around 76,500 plots, and the strategic land pipeline holds around 133,000 plots. Both figures are broadly in line with their June levels.

Despite recent political and economic uncertainty, Taylor reports that the housing market is proving "resilient". Cost inflation pressures are expected to reduce in 2020.

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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.