Stockwatch: Best yield on the market

Does Taylor Wimpey offer perhaps the best yield on the London stockmarket? This blue-chip housebuilder is projected to distribute about 14p per share in respect of 2017 and about 15.5p in 2018, implying a prospective yield edging over 8%.The 2016 prelims have affirmed market expectations, with a target total of £1.3 billion to be paid out in cash over 2016 to 2018, hence renewed buying interest taking the price over 180p. 

It's a tantalising situation that continues to climb a wall of worry about cyclicality and Brexit, yet merits special interest among house-builders due to strong cash and landbank aspects.   

Dividend drivers robust

2016 profit/earnings measures have soared 20%+ on revenue up over 17%, and a strong cash flow profile has boosted net cash up 63.3% to £364.7 million.  Moreover the long-term financial record (see table) shows little by way of capital spending versus cash flow, making Taylor's business model well-suited for shareholder payouts. 

Management says it has made a very good start to 2017,  with 0.91 homes per site sold weekly compared with 0.77 a year ago.

The UK housing market fundamentals remain good with strong customer confidence in our core geographies. The market is underpinned by a competitive mortgage market and low interest rates. Whilst the wider London market remains robust, prime central London is softer, as previously highlighted, however, house prices are stable, and there are good levels of underlying demand.

Against such a message it's very hard to assert a bear case unless say, Brexit proves an economic disaster.Admittedly there have been signs of vendors forced to reduce prices in the housing market generally, and as inflation starts to tick up also the US central bank gradually normalising its monetary policy, the Bank of England will eventually follow form.

But unless inflation takes off ,the Bank has shown itself mainly prioritised around supporting modest growth since the 2008 financial crisis. With the housing market so significant to UK economic confidence it seems unlikely mortgage interest rates will take a hike for the medium term.Profit projections aren't excessive, they anticipate some consolidation after recent years' strong growth, and earnings cover for the dividend looks fair - thus it should remain supportive for the shares.

Strong landbank

Another bullish element is Taylor's landbank profile, said the strongest of all UK housebuilders. Short-term this involves 76,000 plots equating to 5.5 years of supply (at current completion levels) with 6,355 plots acquired during 2016 - the average plot cost being only 15.4% of the selling price.

Taylor's strategic pipeline - land with no residential planning permission at the time of purchase - involves 108,000 potential plots as of end-2016, having converted 9,519 plots to the short-term landbank during the year. 

Amid today's hungry search for yield, it's unlikely Taylor shares will drop

This is encouraging to offset cyclical risks - Taylor has an extent of margin cushion should demand for housing and sale prices ease. The balance sheet has only £3.5 million intangible assets and no capitalised goodwill, thus high confidence in its 88.6p per share, net asset value, although like all house-builders this measure looks cyclically extended. 

When I first drew attention to Taylor Wimpey repeatedly from 15p a share in January 2009 and through 2010, its price bumped around - up to 50p and back to 25p - tangible net assets had been 159p per share at end-2008. 

From a contrarian perspective and in relation to the 'buy/add' consensus among brokers currently, it's interesting to recall how some analysts argued in late 2010, the difficult outlook meant a 30% discount to net assets was deserved. 

Amid today's hungry search for yield it's unlikely Taylor shares will drop even to a median long-term value relative to net assets, as its dividend credentials are so strong - for as far as it's possible to see.

Directors retaining shares

On 28 February, Taylor's chief executive, finance director and legal director were altogether awarded 1,905,085 shares at nil cost. Then on 1 March, after the closed period on dealings ended, a total 897,637 shares were sold at 179.32, said "to meet tax and commission charges".

Their retaining equity underlines a confident outlook; it would be time to worry if they had used this opportunity to lock in profits. Ideally you'd see fresh buying but the implication is their reckoning to run equity gains.

They say the outlook is for "ongoing stability and incremental price growth" in house prices, so doubting this is to assume their perspective is soaked in the momentum of operations without due regard to inevitability of housing cycles.

Further upside looks likely while the housing market remains resilientMind that house prices have reached a multiple of 10 times earnings in a third of England and Wales, and are on average above 6 times earnings seen at the previous cyclical peak in April 2008.

In the intervening period some economists argued 5 times earnings was unsustainable, but the Conservatives' help-to-buy mortgage guarantee scheme and ultra-low mortgage rates kept the market invigorated. 

Taylor's booming profits as shown in the table, with 39% of its homes bought via help-to-buy last year and a 10.9% increase in their average selling price. Sceptics might say this reflects financial distortion.

Yet Theresa May's government has closed help-to-buy and this hasn't checked buyers as shown by Taylor's positive start to the year. Chancellor Hammond has said: "It is important to note that the end of this particular scheme does not diminish in any way the government's commitment to supporting those looking to get on the housing ladder." This should make next Wednesday's spring Budget interesting.

When I drew attention again last September at 150p, I argued an 8% prospective yield priced in plenty of risks and "if the board can deliver on the dividend expectations then the stock should trade higher" - which is what we see.

Dividend expectations have strengthened such that at 186p the prospective yield can still be seen at about 8% compared with about 6.5% for the sector; therefore further upside looks likely while the housing market remains resilient.

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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.