AJ Bell: FTSE 100 firms return £137bn to shareholders

AJ Bell, the Salford investment platform giant, has estimated that FTSE 100 companies are set to return £137.2 billion to their shareholders in 2023 including ordinary dividends, special dividends and stock buybacks.

That figure equates to 6.9% of the FTSE 100’s £2 trillion market capitalisation and is just below 2022’s all-time high of £137.6 billion.

“The value of share buyback announcements keeps growing, however, and 2023 is still in with a chance of setting a new all-time high for cash returns from the FTSE 100, adding together ordinary dividends, special dividends and buybacks …” said AJ Bell in its latest Dividend Dashboard.

“The combination of a £2.0 trillion market cap and aggregate ordinary dividend forecasts of £77.8 billion for 2023 and £83.7 billion in 2024 mean the FTSE 100 offers a forecast dividend yield of 3.9% for this year and 4.2% for next …

“That compares to 4.5% for two-year gilts and 4.0% for ten-year gilts, which offer tax-free income and come with less capital risk (but also more limited potential for capital appreciation) …”

AJ Bell said that analysts are still expecting a new all-time high for aggregate FTSE 100 pre-tax profits in 2023 at £250.7 billion.

However, that forecast has slipped by nearly 10% from £275.5 billion over the past 12 months, as estimates for the banks, miners and oils have been trimmed back to varying degrees.

AJ Bell investment director Russ Mould said: “The FTSE 100 continues to paddle sideways. The UK’s leading index is no higher than twelve months ago or indeed six years ago, a picture that pales next to the growth and momentum driven US indices, such as the S&P 500 or the NASDAQ.

“Yet the FTSE 100 could still appeal to patient accumulators of income, given a forecast dividend yield of 3.9% for 2023 (and 4.2% for 2024), although an inflation rate of 4.6% and ten-year Gilt yield of 4.0% mean even those numbers do not shine quite as brightly as they used to.

“However, inflation is way down from its autumn 2022 peak of 11.1% and the financial markets are now pricing in at least four interest rate cuts of one-quarter of a percentage point from the Bank of England by the end of 2024.

“That would take the base rate down to 4.25%, and potentially weigh on UK Government bond yields, to further raise the profile of the UK equity market’s income potential, at least if inflation stays relatively benign.

“Equally, competition from gilts and even cash in the bank may be one reason why the FTSE 100 is failing to make any major progress.

“Another is worries that the long-awaited recession may finally take hold in 2024, even as the Sunak-Hunt administration tries to provide some boost to the economy. Aggregate profit estimates for 2023 and 2024 keep drifting lower, even if the FTSE 100’s members earn more in total overseas than they do here in the UK.

“The hefty portion of earnings from unpredictable sectors such as miners and oils, and economically sensitive ones such as banks and consumer discretionary, may not help here.

“That 3.9% dividend yield for 2023 is based upon estimates for a 3.8% increase in total dividend payments to £77.8 billion.

“An anticipated 9.5% increase in pre-tax income to a new all-time high of £250.7 billion offers support to those assumptions, although tax rates are rising and underlying net profit is expected to drop across the FTSE 100 as a whole by 13.5% to £168 billion, thanks in part to higher taxes.

“That will not help dividend growth, and although analysts are looking for an 8.6% rebound in adjusted net profit in 2024 that would still leave earnings below 2022’s peak.

“This is understandably influencing boardrooms when they consider what is the correct amount of cash to return to shareholders as a thank you for their support.

“That forecast total of £77.8 billion in ordinary dividends is 9% below the all-time high of £85.2 billion paid out in 2018, to reflect a difficult period that has witnessed the aftermath of Brexit, COVID-19, the return of inflation, higher taxes, increased wages and a surge in interest rates after twelve years of record-lows.

“Analysts have even shaved £0.9 billion off their aggregate dividend payment forecast for 2023, and sliced off £1 billion for 2024, in the past three months alone.”