AJ Bell: FTSE 100 dividends to grow 25% to £77bn

Salford-based investment platform AJ Bell said on Tuesday that total FTSE 100 company dividend payments — excluding special dividends — are expected to grow by £15.2 billion or 25% this year to £76.9 billion.

Rio Tinto is expected to be the index’s single biggest dividend payer in 2021, well ahead of British American Tobacco, Shell, BHP Group and Unilever.

Nine firms are forecast to offer a yield of more than 7%.

AJ Bell said 12 FTSE 100 firms have also announced share buybacks to supplement dividends, with an aggregate value of £7.2 billion.

AJ Bell investment director Russ Mould said: “The FTSE 100 is currently expected to yield 3.7% in 2021, helped by the first year of dividend growth since 2018.

“The index’s total dividend pay-out is expected to reach £76.9 billion in 2021, compared to £61.5 billion in 2020.

“That equates to a 25% or £15.2 billion post-pandemic rebound, with analysts forecasting a more modest £2.9 billion or 4% increase in 2022.

“Total payments peaked at £85.2 billion in 2018 and even 2022 is not expected to return to that level as corporate profits, cash flows and confidence look to recover from the effects of the pandemic.”

The firms with buybacks are Barclays, Berkeley, BP, CRH, Diageo, Ferguson, NatWest, Rightmove, Sage, Standard Chartered, Unilever and Vodafone.

“By contrast, just two FTSE 100 firms – JD Sports Fashion and Severn Trent– have tapped investors for money so far this year and that was for just £714 million between them,” said Mould.

“That compares to 14 deals for a total of £16.3 billion in 2020.

“That may offer some encouragement to those with hefty exposure to UK equities, bearing in the mind the adage about how ‘bull markets end when the money runs out.’

“At the moment, dividends and buybacks mean more money is flowing into investors pockets than is flowing out.”

Mould said investors will have to carefully monitor the list of the highest-yielding firms, as some of them have a track record of having to cut their dividend payments when times get tough.

“At the time of writing, Rio Tinto is the highest-yielding individual stock, closely followed by BHP,” said Mould.

“Forecast of yields in the region of 10% may make investors a little wary, given the shocking record of firms previously expected to generate such bumper returns, including Vodafone, Shell, Evraz itself and – when they were still in the FTSE 100 – Royal Mail, Marks & Spencer and Centrica.

“All were forecast to generate a yield in excess of 10% at one stage or another and all cut the dividend instead.

“China’s reported displeasure at soaring iron ore prices may persuade some investors to question whether Rio Tinto really will make such a bumper payment and analysts do not expect a repeat performance in 2022, perhaps for that reason.”

Mould added: “Just 10 companies are expected to generate 87% of 2021’s dividend increase.

“Miners and banks in particular are providing support to aggregate consensus earnings and dividend forecasts.

“Rio Tinto and BHP Billiton are the top two, so income-seekers will need to keep an eye on the price of iron ore in particular.

“The Big Five lenders – Barclays, HSBC, Lloyds, NatWest and Standard Chartered – took their lead from the Prudential Regulatory Authority by cancelling all dividends at this time a year ago and they did so again this spring by recommending payments, once they had received clearance to do so.

“Even though Barclays and Standard Chartered both declared lower dividends than analysts had expected and opted to take the share buyback route as well, four banks sit alongside four miners in the list of the ten stocks that are expected to make the biggest individual contributions to the £15.3 billion total increase in FTSE 100 dividends in 2021.

“The only FTSE 100 bank not in the top ten is Standard Chartered and it still ranks fourteenth in the list of forecast dividend increases for this year, in cash terms …

“Investors must assess concentration risk when it comes to dividends as well as earnings, an issue which has dogged those who have sought income from the UK stock market for some years.

“Just ten stocks are forecast to pay dividends worth £40.2 billion, or 52% of the forecast total for 2021.

“The top 20 are expected to generate 71% of the total index’s pay-out, at £54.4 billion …

“Dividend growth is so powerful because it almost inevitably drags a share price higher.

“The average dividend yield for the 15 ten-year raisers is forecast to be 2.4% in 2021, below the 3.7% average across the FTSE 100.

“But their below-average yields have hardly proved a barrier to excellent total returns over the subsequent ten years.

“That is at least partly because, the dividend yield available on the March 2011 share price using forecast 2021 dividends is 8.5% – and if anyone offered an investor a guaranteed 8.5% dividend yield they would probably snap your hand off, so that shows how a rising dividend can lift a share price, boosting income and capital gains for a powerful total return …”

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.