Taylor Wimpey plc is in the business of homebuilding with diversified operations into UK, Spain, and North America as well as in Gibraltar. The firm aims to be one of the leading homebuilding businesses in the country and become preferred choice for its customers. The basic expertise of the firm are based on improving the quality of life of their customers by offering services including land acquisition, community development as well as development of supporting infrastructure.
A closer look at the financial health of the firm will indicate that its total revenue has declined from £4.143B in 2007 to £2.596B in 2009. Similarly, its return on equity is negative whereas total debt to total assets as well as total debt to total equity is in the higher range. The current performance of the firm therefore may not be considered as healthy and significant owing to the current financial downturn wherein homebuilding business has been hit the most due to general decline in the credit extended for acquiring the mortgages.
The above patterns also indicate that the firm has historically being dependent on the external finance and as such its efforts in the economic downturn were focused most on the consolidation of its cash flows and debt rationalization in order to make it more competitive in risky environment.
This paper will attempt to critically discuss the financing structure of the firm with special focus on the utilization of debt by the firm, its dividend history besides estimating the cost of equity using Constant growth model.
A closer look at the financing mix of the firm will indicate that the firm has started to utilize more debt during 2008 as its total long term debt to total equity ratio started to swell during this period. Before that period this ratio was normal and as such there was no sudden increase in the financing mix before the start of the financial meltdown in the country. The higher dependence on debt during this period may also be a result of steep decline into the mortgage market as demand for new homes declined during this period.
Date from 2006 to 2009 indicates that the firm has been focusing more on utilizing its own internally generated funds to leverage its activities rather than relying more on the external fiannce. The trend has almost reversed during 2009 wherein total long term debt is only 59% of the total equity and as such there is no historical trend that can suggest that the firm is reliant on the external finance.
It can therefore be safely assumed that the company's focus is on maintaining the long term to equity ratio within an acceptable range however, trends do not indicate a particular pattern which can reflect upon the particular policy adapted by the firm to have a pre-determined ratio to follow. It seems that that the firm has a determined policy of adjusting its financing mix according to the economic conditions of the country. During 2009, firm has been able to consolidate its debt and as such it has further rationalized its cash flows to release some pressure on its depleting resources.
Most of the long term debt is in the form of debentures as well as bank loans whereas Bank loans and bonds are in multi-currency i.e. GBP and Canadian/US Dollars which can create significant risk for the firm in terms of foreign exchange risk. The debentures are issued at various rates and are of various maturities with last tranche of bonds to be expired in year 2019.
It is critical to note that that the highest rate offered on bonds is 9.00% p.a. which matured in 2009 whereas rates offered on other tranches of bonds ranges from 4.98% to 6.8% p.a. most of the bonds issued by the firm have fixed interest rates and as such firm may not be able to take advantage of the current low interest rate scenario wherein interest rates have been slashed to almost zero level in national as well as at international level. Though there are no details available regarding the debt rationalization by the firm however, it seems that the firm must have re-negotiated its bank loans with its bankers to take advantage of the low interest rate scenario that is currently prevailing in the economy.
The above trend indicate that the firm has not paid any dividend during 2008 and 2009 however, it paid highest dividends during 2007 in last five years. This step decline in the dividends paid out may also be attributed to the fact that the firm was going through a consolidation phase wherein it engaged itself into the consolidation phase and further consolidated its cash flows and rationalize its debt position. Since these trends reflect a particular period of time i.e. the period of time which is probably one of the most volatile in terms of economic activity and was tough for the firms to maintain their profitability. As such the economic conditions generally and lack of demand for new homes may led to the decline in the profitability of the firm and hence its dividend paying capability.
The patterns however, do indicate that the firm has been consistently paying the dividends and out of five years, it has paid dividends for three consecutive years before falling prey of the adverse economic conditions.
The following graph indicate the changes into the earnings per share of the firm which has remained negative during 2008 and 2009 whereas in other years it was positive. These trends also indicate a volatile activity as the profitability of the firm has shown an steep decline from 2007 to 2009.
The following grap also indicate that the payout ratio has been volatile in nature as the firm has paid substantial dividends out of its earnings for first few years however, as it experienced the losses, it curtailed on its dividends and resultantly pay out ratio has declined too. This ratio indicates that the payout ratio has remained stable for 2005 and 2006 whereas in 2007 it has shown an step decline. In 2008 and 2009, company has not paid out any dividends such that it may be difficult to comment on the any particular type of patterns that may be witnessed during last five years.
The trends in dividends however, indicate that the firm has a policy of paying off the dividends even in case it incurs losses however, since firm has been in consolidation phase during 2008 and 2009, the same patterns may be justified.
Due to lack of availability of 10 years data it is therefore impossible to look into the longer term patterns of the dividends as well as the payout ratios. The data that is available i.e. five years data do not indicate any particular patterns so far and as such it may be difficult to predict on the future viability of the firm and its near term future growth prospects.
Constant Growth Model
Using constant growth model, it is impossible to compute the given figures because there is negative growth in the dividends, earnings as well as sales. All the indicators therefore indicate that to properly estimate the cost of equity, some other method such as CAPM may be used.
Constant growth model has its own limitations and may not be the correct method to use in more volatile situations. It is mostly suited to the stable economic conditions and as such in environment like the current economic environment it may not be prudent to utilize the constant growth model for computing the required rate of return as well as cost of equity.
Five years data analysis indicates that the firm has been using combination of long term as well as equity financing mix. Historically firm has relied more on the equity to finance its activities however, lately during 2007 and 2008, the long term debt level increased to manifolds. Similarly, the dividend patterns during last five years is little erratic too as the firm has not paid any dividends since last two years. The price of the share has systematically declined too however, it is still in acceptable range probably because of the future expectations of the investors in the ability of the firm to turnaround in near future.
Given the historical trends during last five years, it is almost impossible to calculate the cost of equity using the constant growth model. All the growth indicators are showing negative growth and as such it may be difficult to compute the key indicators such as dividend yield, growth rates as well as cost of equity. In order to compute these indicators, it may be more plausible if methods like CAPM are used to compute the required rate of returns as well as future dividend patterns of the firm.