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Do you like the sound of a dividend stock with an 8.6% forecast yield, and with analysts also predicting a share price rise of 21%?
Me too. The one I’m talking about is Taylor Wimpey (LSE: TW.), which has been through a tough patch these past few years.
Price targets
There’s a pretty strong buy consensus out on Taylor Wimpey shares at the moment, with an average target price of 132p. From the 109p price at the time of writing, that would suggest a 21% increase. These targets tend to be short term too, and forecasts out to 2027 are upbeat about earnings. So maybe we should expect further gains to come.
Analysts predict a 75% rise in earnings per share between 2024 and 2027. Based on today’s share price, that would suggest a price-to-earnings (P/E) ratio of just 10 by 2027.
That seems way too cheap to me, especially for a stock offering such an impressive dividend yield. So why aren’t investors rushing out to snap up cheap Taylor Wimpey shares and push the price up? Well, it looks like things are likely too get tougher before they get better.
Weaker demand
A trading update on 1 October was decent, with the company confirming its guidance for between 10,400 and 10,800 UK completions this year. But we also heard of “softer market conditions beginning in the second quarter“. And the number of outlets is expect to dip slightly by the end of the year.
Analysts expect earnings per share to fall short this year, and not cover the predicted dividend. And speaking of the dividend, they expect it to drop slightly between now and 2027 — though not by much.
It fits in with this year’s interim payout, lowered to 4.67p per share from the 4.8p paid at the halfway stage in 2024. But even the slightly softer dividend predicted out to 2027 would still yield 8.3% on today’s share price. I see a good bit of safety margin in that.
Beating the professionals
The outlook for interest rates is still uncertain. Yes, September inflation came in better than expected. But at 3.8%, we still have some way to go.
So the outlook for the next year or two is cloudier than I’d really like, as an investor in house builders myself — I bought Persimmon shares some time ago.
But I think that gives private investors a significant advantage over the big City firms. An uncertain short-term outlook can keep them away, for fear of ending the year holding stocks that are down.
Long-term outlook
But we can simply ignore all of that, with no need to care what our short-term portfolio allocation looks like. Even if Taylor Wimpey’s return to growth might take longer than we’d hoped, it doesn’t matter.
I think any investor who sees good long-term value here in a sector with a strong future — as I do — should consider buying Taylor Wimpey shares. If I wasn’t already in the sector, Taylor Wimpey would be my choice. I might still buy some — the temptation is strong.
This story originally appeared on Motley Fool
