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Yesterday, Taylor Wimpey (LSE:TW) shares jumped 4% to trade at 160p following a better than expected trading announcement. The share price is still down 6.7% over a longer one year period. However, there are several reasons why we feel that the company could offer investors gains for the rest of the year. Here’s why.

Strong cash position

The company announced that it was looking to embark on a share buyback due to the surplus cash that it has on the books. It’ll also be likely to increase the dividend per share. Given that the current dividend yield is 5.16%, further upside would make it a very attractive pick for dividend investors.

Part of this attraction comes due to Taylor Wimpey being able to generate excess cash. This is due to the business “ending the year with strong net cash of £837mn (31 December 2020: £719.4mn net cash), ahead of expectations due to the timing of land spend”.

Even if land spend increases later this year, robust house prices and a solid forward order book should allow cash flow to remain buoyant as completions are made. Therefore, this could allow Taylor Wimpey shares to move higher due to income investors buying in.

Positive outlook via forward orders

The second reason we like Taylor Wimpey shares is due to a positive outlook. For homebuilders, there’s an importance of the forward order book. It helps to give an indication of what demand is like over the next 12 months. In the trading update, the business commented that “we ended the year
with an excellent order book valued at £2,550 million (31 December 2020: £2,684 million), excluding joint ventures, which represents 10,009 homes (31 December 2020: 10,685 homes).”

From this we can see that although the book isn’t quite as strong as this time last year, it’s not far off. It also doesn’t show any significant decline that some were forecasting. With record house prices and interest rates creeping higher, some thought that the property market could really struggle in Q4 ’21 and Q1 ’22. So far, it doesn’t appear to be the case, which is supportive for Taylor Wimpey shares.

Taylor Wimpey shares aided by low rates

Even with the Bank of England raising interest rates in December, it was only by 0.15%. Interest rates remain at very low levels on a historical basis. With uncertainty around the UK economy from Covid-19, we doubt that the central bank will be in a rush anytime soon to raise interest rates much beyond 1%. 

This should allow mortgage rates to remain affordable, particularly for first time buyers. This key sector in the property market should therefore continue to be active in getting on the housing ladder, buying houses form Taylor Wimpey and others. As long as mortgages remain affordable, the business should continue to show growth.

Overall, we think that Taylor Wimpey shares could offer strong growth potential this year, as well as an above average dividend yield.

2 thoughts on “3 reasons why homebuilder Taylor Wimpey could see shares rally in 2022”
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