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Taylor Wimpey - dividend suspended amid COVID-19 disruption

Sophie Lund-Yates, Equity Analyst | 24 March 2020 | A A A
Taylor Wimpey - dividend suspended amid COVID-19 disruption

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 145.50 | Buy: 145.65 | Change -9.15 (-5.91%)
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In response to the government's actions to combat the COVID-19 pandemic, Taylor Wimpey closed all sales offices on 23 March. Construction sites will begin closing down today, 24 March.

The group is implementing measures to preserve cash, including cancelling its proposed final and special dividends.

The shares fell 2.7% in early trading.

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Our view

The coronavirus pandemic and associated society wide shutdowns are a grave threat to the housebuilding sector.

In our view, many people are likely to delay moving house for at least the next few months. Furthermore, potential job losses and corporate bankruptcies could cause financial hardship to many, and buying a new house will probably be the first thing wiped off to-do lists. That means housebuilders face both lower volumes and lower prices if the disruption is sustained.

If it happens, this will have a significant impact on profits and cashflows, and the extent of the damage will depend on how long the disruption lasts.

Housebuilders have masses of capital tied up in land, raw materials and homes at various stages of completion. If house prices fall far enough these can't be sold at a profit and their value will be written down. If volumes also decline the problem is compounded, and cash flow can quickly become a real issue.

That's why Taylor is taking drastic measures to keep cash within the business. The group has suspended all dividend payments and fully drawn down its available credit lines. It's worth keeping an eye on the land creditor position though, as Taylor Wimpey has promised to fork out over £700m which doesn't show up in net debt. In our view, Taylor looks like it probably has enough immediate liquidity on hand to ride out disruption, provided it's short lived.

However, sustained disruption or a severe recession will prove much harder to cope with.

Fortunately, other fundamental factors driving the UK housing market in recent years remain in play. 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. In the long term we expect the housebuilding sector to be fine, but the short term could be tough and individual companies may struggle.

Still, Taylor has demonstrated good strategic planning in the past. 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 market has recognised the risks to Taylor's business and the shares have fallen heavily since the outbreak began. The shares currently change hands for 1.1 times book value, although as discussed above, book value could be written down if house prices fall far enough.

Overall, Taylor Wimpey has done well and thrived while conditions have been favourable. The current economic upset could knock a substantial hole in Taylor's profits though, and if sustained could prove an existential threat.

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Trading update

Taylor Wimpey said its business had only been meaningfully impacted very recently.

In order to conserve cash, management has stopped all discretionary spending on land and has drawn down on a £550m revolving credit facility. This gives the group £807m in cash, and £165m in net cash (cash minus debt) as of 23 March 2020.

The group has previously conducted stress tests that indicated the ordinary dividend of around £250m was sustainable during a "normal downturn". However, management acknowledges the current situation goes beyond a normal downturn, and is therefore suspending the dividend.

The 3.80p per share payment, due on 15 May, will conserve around £125m. The special dividend of 10.99p per share, due on 10 July, will save around another £360m.

Taylor is also withdrawing its previous guidance for 2020, and will update the market when there is greater clarity around the current crisis.

The group has changed the time of its AGM to 9.00AM on 23 April 2020. The company recommends shareholders do not attend in person, in line with government advice. A dial in number will be provided so that shareholders can participate over the phone.

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