What next for Taylor Wimpey share price after distributions cut?

Taylor Wimpey share price plunged today, July 31, reaching a low of 76.42p, its lowest level since July 8, after the management slashed its payouts to investors amid woes in the UK housebuilding sector. TW stock was trading at 79.16, down by 25% from where it started the year.

Taylor Wimpey has slashed its payouts

The UK housebuilding industry is going through major challenges, including elevated mortgage rates, high inflation, regulations, and the affordability crisis. This explains why all publicly-traded housebuilder stocks have plunged by double digits this year.

The impact of this crisis is affecting companies. In a statement, Taylor Wimpey, a major housebuilder, said that it will slash its payouts to investors in a bid to preserve its balance sheet. It revised its annual shareholder returns to 4% of net assets, reflecting the prolonged downturn and to preserve its balance sheet. Its net cash dropped by nearly 50% to £168 million.

The company slashed its payouts after it reported a substantial decline in its operating profit. Its operating profit dropped by 20% in the year’s first half to £129.7 million, with its operating margin dropping from 9.7% to 7.7%.

The margin compression happened even after its revenue continued to grow. Its revenue rose modestly by 1.7% to £1.68 billion.

UK housing downward spiral continues

There is a risk that the housing market will continue its downward spiral in the near term. For one, the odds that the Bank of England (BoE) will hike interest rates later this year have jumped on Polymarket. The bank decided to leave rates unchanged at 3.75% on Thursday.

Data shows that the UK’s bond yields have risen in the past few weeks. The ten-year yield rose to 4.97% today from this month’s low of 4.67%. Similarly, the five-year yield rose to 4.52%. In a statement, Jennie Daly, the CEO, said:

“Housebuilding drives growth, jobs and opportunity across the UK, and getting first time buyers onto the housing ladder is essential for a functioning housing market. Rising build costs and the cost of regulation are making it harder to build in the places where homes are needed most.”

Historically, stocks normally drop whenever the management decides to slash their payouts. However, in some cases, the cut can be a good catalyst as it means that the management is focused on improving the balance sheet. A good example of this is GE, which slashed its dividend in 2017 as Larry Culp implemented its turnaround strategy.

TW stock chart | Source: TradingView

The daily timeframe chart shows that the TW stock price has slumped in the past few months, moving from a high of 117p in February to a low of 74p in June this year. Recently, it has formed a horizontal channel, which is part of the bearish flag pattern. This pattern normally leads to a bearish breakout over time.

Taylor Wimpey stock has found a strong resistance at the 100-day Exponential Moving Average (EMA). It also remains below the Supertrend indicator.

Therefore, the near-term forecast for the stock is bearish, with the initial target being the year-to-date low of 74p. A move below that price will point to more downside, potentially to the support of 65p.