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Taylor Wimpey plc (LON:TW.) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of TW.’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Check out our latest analysis for Taylor Wimpey
What is free cash flow?
Free cash flow (FCF) is the amount of cash Taylor Wimpey has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
There are two methods I will use to evaluate the quality of Taylor Wimpey’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Although, Taylor Wimpey generate sufficient cash from its operational activities, its FCF yield of 9.04% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Taylor Wimpey have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at TW.’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 25.4%, ramping up from its current levels of UK£580.3m to UK£727.4m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, TW.’s operating cash flow growth is expected to decline from a rate of 15.1% next year, to 8.9% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
High operating cash flow growth is a positive indication for Taylor Wimpey’s future, which means it may be able to sustain the current cash yield. However, if you factor in the higher risk of holding just Taylor Wimpey compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Taylor Wimpey to get a better picture of the company by looking at: