FTSE 100

Why has the Taylor Wimpey share price lagged the FTSE 100 index?

Could the Taylor Wimpey share price (LON: TW) deliver an improved performance in future?

While the FTSE 100 index (INDEXFTSE: UKX) has produced a 10% return since the start of the year, the Taylor Wimpey share price (LON: TW) is currently flat over the same period.

Yet, the housing market has enjoyed one of its strongest periods of growth for many years. House prices have reached record highs, while Taylor Wimpey and its peers have experienced robust demand for their new homes.

Indeed, the company’s new completions in the first half of the year were 7,219 versus 2,713 in the first half of the previous year. Moreover, the firm reported that it is on track to meet the upper end of expectations regarding annual completions. It also increased its profit guidance for the full year when reporting its half-year results.

However, investor sentiment towards the Taylor Wimpey share price has been relatively weak. This could be down to a number of factors, including the prospect of higher interest rates. The Bank of England has seemingly become more hawkish of late, as rising inflation has apparently prompted a greater willingness to increase interest rates to try to cool a fast-rising price level. Higher interest rates may make homes less affordable.

Of course, rising inflation could also mean higher costs for FTSE 100 housebuilders such as Taylor Wimpey. This may squeeze profitability. And, with higher interest rates potentially leading to slower economic growth, demand for new homes could be impacted even further.

In addition, concerns about the end of the stamp duty holiday may have held back the firm’s share price this year. However, the continued rise in house prices suggests it was not the only catalyst behind record house price growth.

Looking ahead, Taylor Wimpey’s share price could offer good value for money relative to many FTSE 100 index shares. It trades on a forward price-earnings ratio of around 10, which suggests it could offer a margin of safety. It is also forecast to post an annualised growth in earnings per share of 18% over the next two financial years.

Certainly, the threat of Covid-19 restrictions, rising inflation and the prospect of higher interest rates may dampen investor demand for the company’s shares. However, this may already be factored into its valuation and could mean it has a better chance of delivering stronger performance relative to the FTSE 100 index over the long run.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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