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Home builder Taylor Wimpey (LSE: TW) announced this month that it was increasing its annual dividend by 9.6%. That brings it to 9.4p per share, which at the current share price equates to a yield of 8.3%. That certainly catches my eye – but are Taylor Wimpey’s dividend forecasts that appealing?
Homebuilders often have quite volatile dividends.
When the housing market is doing well, they can generate a lot of free cash flow. Some can be used to buy land, but beyond that there are often limited uses for the money inside the business, so it is paid out as dividends. When real estate prices crash or sales volumes fall (often these two things go hand in hand), dividends can be sharply reduced or cancelled.
Before the pandemic, for example, Taylor Wimpey’s annual dividend was 16.9 pence per share. But in 2020 it cut payouts and raised funds by issuing new shares, diluting existing shareholders.
It was a similar story during the financial crisis of 2008. The share price had fallen by more than 85% in one year and the company had tried unsuccessfully to raise half a billion pounds in the framework of a rights issue. The annual dividend of 15.8 pence has been removed. In other words, even after this month’s generous increase, the dividend is about 40% lower than it was in 2007.
Taylor Wimpey dividend forecast
But while it may have cut its dividend significantly before, that doesn’t necessarily indicate what the next few years hold for the company’s shareholders.
Basic earnings per share of 18.1 pence last year meant the dividend was more than covered. Even if earnings are stable rather than increasing, Taylor Wimpey’s dividend could continue to increase significantly for years to come.
The company generated a positive free cash flow of £29m, after paying out £324m in dividends and spending £151m to buy back shares. This is sustainable if earnings remain at their current level. Even if they fall, it is possible that the dividend will be maintained or increased, by stopping share buybacks.
What about Taylor Wimpey’s dividend forecast? The stated goal of the company is to “provide an attractive and reliable stream of income to our shareholders, throughout the cycle, including during normal downturns, via an ordinary cash dividend”. It tries to pay out 7.5% of net assets or at least £250m a year throughout the economic cycle. He estimates he can do this if house prices fall by less than 20% and sales volumes fall by less than 30%.
In practice, I have my doubts as to whether the company would pay the same dividend if things went so badly, or seek to preserve cash instead. For now, although the company says that “the weaker economic environment continues to impact the near-term outlookhe remains optimistic about sales prospects. If the housing market doesn’t dramatically worsen, I expect Taylor Wimpey’s dividend this year to be the same or higher than last year.
This, however, depends on the health of the real estate market. Longer term difficult to assess. A sharp drop in selling prices could mean a drop in the dividend. At this time, I have no intention of buying the shares.