9% income! But how risky are Taylor Wimpey shares?

I bought Taylor Wimpey (LSE: TW) shares on two occasions last month and I’m keen to go for the hat-trick, but I’m also a little bit wary. There are so many things I like about the FTSE 100 housebuilder, but there are major risks too.

Let’s start with the positives. I bought Taylor Wimpey because I like investing in quality blue-chips when their shares are out of favour and cheap as a result. Especially if the fall isn’t the company’s fault, as is the case here.

Lots to like

Taylor Wimpey is certainly cheap, trading at just 5.6 times earnings. It also comes with an ultra-high yield of 9%, which I always find hard to resist.

While the group faces serious challenges, this isn’t down to bad management. Like the rest of the housebuilding sector, it’s at the mercy of rising interest rates and distressing events in the Middle East.

Britons are still desperate to buy homes and Taylor Wimpey can’t build them fast enough. In normal times the demand/supply imbalance would work in favour of the producer, but these aren’t normal times.

Investors spent most of 2023 assuming interest rates would peak in the autumn and fall next spring. As a result, the Taylor Wimpey share price is actually up 16.67% over one year. Optimism is now fading as the ‘higher for longer’ interest rate mantra takes hold. The shares are down 14.38% over six months and 5.63% over the last week.

So far house prices have only fallen by around 5%, although after inflation that’s a real terms drop of around 12%. This is hitting revenues, which crashed 21.2% in the first half of 2023. Profit before tax fell almost 29% to £237.7m.

I bought Taylor Wimpey on 1 September for 114p and again on 29 September for 124p. With the stock now trading at 104p I’m down around 12% overall. Now I’m wondering whether to average down and buy more.

Difficult times

Equities sold off last week over fears the Israel-Hamas conflict could spread. I’ve no idea what will happen in the Middle East. Nobody knows. The only thing I can do when buying shares is look at company fundamentals, and here Taylor Wimpey looks pretty solid.

In 2022, revenues rose 3.15% to £4.4bn with pre-tax profit up 33.5% to £907.9m. The first half of 2023 was tougher, inevitably, with revenues crashing 21.2% to £1.64bn and profits down 29% to £237.7m. That trend is likely to continue.

Yet management is proud of its “robust” balance sheet and Taylor Wimpey ended H1 with net cash of £654.9m, up from £642.4m a year earlier.

While I worry about the short-term share price volatility, my major concern is whether the dividend is secure. In an encouraging sign, management bumped up the interim payment from 4.62p per share to 4.79p in August. The forecast yield for 2023 looks steady at 8.9% but dividend cover is forecast to halve from exactly twice earnings to just once. If today’s malaise drags on, it could come under pressure.

I still find Taylor Wimpey shares hard to resist and plan to average down over the next few days. If it does crash afterwards, I’ll probably respond by buying even more.