Taylor Wimpey shares: my top passive income buy

A potential housing market crash and possible dividend cuts are already in sight FTSE property shares crumble over the past year. But, Taylor Wimpey (LSE: TW) shares are still top choices for long-term potential and passive income.

About Taylor Wimpey Plc

Last updated 03-02-2023, 04:30:00 GMT

Unstable background

The unfortunate combination of rising inflation and high interest rates has driven mortgage rates down for years. As a result, demand and home prices have cooled, with all three housing indexes down since the summer.

Therefore, it is not surprising to see the disappointing numbers that Taylor Wimpey showed in its latest trading update, as the housebuilder produced significant declines in most areas.

Metric	2022	2021	Growth
Total done	14,154	14,302	-1%
Net personal reservation rates	0.68	0.91	-25%
Cancellation rates	18%	14%	4%
Average selling price	£313k	£300k	4%
Book value	£1.94bn	£2.55bn	-24%
Total land bank	144k	145k	-1%

Sentiment around the property market has also not improved. The latest data from the Bank of England (BoE) shows that mortgage approvals (a key indicator for the property market) continued to fall in December. In fact, the agreement has now dropped to a level not seen since the peak of the pandemic and during the financial crisis of 2008. Therefore, the building society and banks expect house prices to fall from anywhere between 8% to 15% this year.

Build a second income

However, I believe Taylor Wimpey still offers long-term investment opportunities for growth and passive income. Thanks to the strong foundation, it is impossible FTSE 100 stalwart has to raise capital through debt or equity, which is good news for shareholders like me. More importantly, the strong balance sheet provides a dividend cover of 2.1 times.

Additionally, Taylor Wimpey shares have a strong history of paying steady and growing dividends, which I recommend as an investor looking for secondary income. The payout may be lower this year, but the forecast 7.1% forward dividend yield is still plenty to pique my interest.

That said, it’s the long term that I’m focused on. I imagine the property market will recover and profits will grow over the next five to 10 years. So, we can see a very large special dividend yield. Although there are no guarantees, the prospect of huge payouts in the future is certainly impressive.

A chance to build wealth

Despite the doom and gloom surrounding the market, the sense of relief from last year is starting to fade. As inflation continues to fall, the Bank of England is likely to pause its rate-hiking cycle soon. This could see mortgage rates stabilize and even fall, providing some support for house prices and Taylor Wimpey’s share price in the medium term.

National Chief Economist Robert Gardner says there are quite a few “Encouraging signs that mortgage rates are normalizing”. And although it is too early to determine whether activity in the market has begun to recover, the Liberium broker believes that the decline in the housing market is not as feared.

So, is the stock a buy for me? Well, he likes it Jefferies, Barclaysand Citi all have a ‘buy’ rating. However, the average price target of £1.23 would indicate that the stock is currently reasonably priced. Current and forward valuation multiples are also advised. For that reason, I would want to add to my current position while the stock is still reasonably priced.

Metric	Multiples of value	Industry average
Price-to-book (P/B) ratio.	1.0	0.9
Price-to-sales (P/S) ratio.	1.0	0.8
Price-to-Earnings (P/E) ratio.	7.5	11.2
Price-to-sales ratio (FP/S).	1.1	1.2
Price-to-earnings ratio (FP/E).	9.0	8.7