Are Taylor Wimpey shares now a brilliant bargain?

Over the past five years, Taylor Wimpey (LSE: TW.) has made for a poor investment, with its share price down by a fifth. Mortgage rates rose for the first time in decades and led to periods where housing market activity effectively froze. But with increasing signs that interest rates are heading lower this year, a potential recovery in the stock looks to be on the cards.

Cyclical industry

Although I subscribe to the view that time in the market beats timing the market, that is not always the case with all sectors. The housebuilding industry is notoriously cyclical and therefore a set-and-forget strategy is unlikely to ever be the right one.

Last year, the average private selling price dropped 3.8% to £356,000. But the housebuilder has guided for this downward trend to reverse this year. It also remains confident of growing sales. For FY25, it’s guiding for total completions to be in the 10,000 to 10,800 range. In 2024, it completed 9,972 homes. Completions are weighted 55:45 in favour of the second half of the year.

Land bank

One of Taylor Wimpey’s greatest strength is its enormous landbank, enabling it to seize on opportunities when market conditions are right.

In December, the government published its long-awaited updated to the National Planning Policy Framework (NPPF) in England. Most of the document is strategic in nature; practical implications for councils will come later.

Among the sweeping changes, it places a duty on local planning authorities to set out clearly defined plans which identify how it intends to meet five years of housing supply land. On top of that, a buffer of 20% is added in areas where there has been significant under-delivery in housing supply over a three-year period.

The business is well placed to capitalise on a required surge in local authority housing targets. As at the end of last year, it had 26,500 plots for first principle planning already in the system.

Inflation

Lower realised selling prices is not the only problem eating into operating margin. Back in January it reported that build cost inflation was starting to tick up again. It’s forecasting low single-digit inflation for 2025, primarily driven by material costs.

Looking longer term, I expect wage price inflation to remain elevated, too. There is already a chronic shortage of labour across the industry. If the government is to meet its house-building targets, then the industry is going to have to pay more to attract workers.

Nevertheless, the company continues to generate extremely healthy cash flows. Its net cash position of £565m comes despite a huge recent land investment and work in progress (WIP). That cash buffer means the dividend looks pretty safe to me. Sitting at 8%, the yield is one of the most attractive in the industry.

I have been toing and froing on buying the stock for some time, but am yet to pull the trigger. But I am intending on buying soon. Unemployment may be at a four-year high, but the mortgage market shows no signs of slowing down. The number of lenders offering 95% loan-to-value mortgages currently sits at a five-year high. And with the business seeing a recent uptick in website traffic to its development sites, the seeds of a recovery are there.