Share of the week: Chasing a dividend hero

It doesn't seem long enough since the 2008 financial crisis to be talking about another recession. But here we are, just over a month to go to the EU referendum and the "R-word" is being openly discussed in the broadsheets. If the worst happens, it'll be bad news - none more so than for the cyclical housebuilders.

Amid rising costs, slowing house price growth and weaker demand, the threat of a housing market crash looms large on the horizon. How close depends on the commentator, of course, but opinions vary widely.

To calm investor nerves and stimulate business, the clever bosses at Taylor Wimpey promise a minimum 2% dividend yield at all parts of the cycle. Triggering City upgrades, it was enough to get investors to bite and the housebuilder's shares have been one of the FTSE 350's top performers this week.

From next year, 5% of the housebuilder's net assets will be paid out via an ordinary dividend - at least £150 million. In addition to the £300 million special dividend scheduled for July 2016, worth 9.2p a share, another £300 million will make its way back to investors in July 2017. Wimpey now offers a prospective yield of 5.6% for this year, rising to 7% in 2017.

Factoring this pay-out into forecasts, Glynis Johnson at Deutsche Bank now reckons the shares are worth 261p, which represents nearly 30% upside.

Taylor Wimpey shares had traded as low at 170p less than five weeks ago, but buyers chased them as much as 13% higher this week. They smashed through resistance at 193p and the 200-day moving average to top 205p for the first time since September last year.

They're now within a whisker of hitting levels not seen since the back end of 2007, although Wimpey has consistently struggled to make a move above 200p stick. A 'stay' vote on 23 June would certainly help.

"We believe the stock is difficult to ignore, despite the industry uncertainties ahead of the Brexit vote," says Johnson.

After stress-testing the dividend scheme, management is confident the policy can withstand a downturn, even with regular special payouts.

But with the lending environment stimulating healthy activity on the new build market, management remains optimistic on the housing market. Wimpey has a good order book, with over 70% of 2016's private completions already sold. This means earnings are more reliable.

The housebuilder wants to increase completion volumes from 14 thousand (k) to 14.5-15.5k, which is 3-4% growth each year. This triggered an upgrade to Deutsche Bank's cash profit forecasts, although this is still below management's 22% operating profit margin target.

"We have stayed a little more conservative on the upside to this intake margin, despite management's view that the assumptions on the land bank may prove conservative given the historic movements in house price inflation," explains Johnson.

"Reflecting this lower earnings before interest and tax margin, DB estimates remain short of the 30% average RONOA [Return on Net Operating Assets] over a cycle (reaching 28% in 2019)."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.