AJ Bell: dividend forecasts drop 10% for 2023 and 2024 from a year ago

Cash returns in 2023 still hold potential to catch 2022’s peak

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Aggregate dividend forecasts for 2023 and 2024 have both slipped about 10% from a year ago, according to AJ Bell’s latest Dividend Dashboard, yet the value of share buybacks have increased with the FTSE 100 still holding the potential to reach a high for dividend payouts for 2023.

As of the end of December, dividends for 2023 sat at £137.2bn, just behind 2022’s £137.6bn, equating to an estimated yield of 6.9% for the FTSE 100 in 2023.

Russ Mould, investment director at AJ Bell, said: “The FTSE 100 continues to paddle sideways. The UK’s leading index is no higher than 12 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.”

The FTSE 100 holds a forecast dividend yield of 3.9% for 2023, expected to rise to 4.2% for 2024. While inflation currently sits at 4.6%, it has dropped dramatically from 2022’s 11.1%, and there are expectations for four interest rate cuts throughout 2024. Mould said the cut could weigh on bond yields, which may “further raise the profile” of the UK equity market.

“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,” Mould said.

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Currently, two-year gilts hold a dividend yield of 4.5% while 10-year gilts sit at 4%.

The estimated 3.9% dividend yield for 2023 is based on an expected 3.8% increase in total dividend payments. There is however an expected drop in underlying net profit which would sink the FTSE 100 by 13.5%, aided by high taxes. While analysts believe some will likely rebound, expectations for 2024 earnings still are below the peak in 2022.

“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,” Mould said.

“That forecast total of £77.8bn in ordinary dividends is 9% below the all-time high of £85.2bn 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 12 years of record-lows.”

See also: Janus Henderson: Global dividends slip as oil firms and miners make large cuts

Analysts expect aggregate FTSE 100 pre-tax profits to hit £250.7bn for 2023, a new peak and a 9.5% increase from 2022. The forecast is, however, an almost 10% drop from last year’s expectation of £275.5bn.

While £77.8bn in ordinary payments are expected for 2023, over half can be attributed to the top 10 dividend payers. The top performers for dividend growth in 2023 were HSBC, with £1.4bn, Shell, with £949m, NatWestGroup, with £270m, British American Tobacco with £266m, and BP with £264m.

“This again highlights the importance of the miners, oils and financials to the overall trajectory of the FTSE 100’s profits and dividends,” Mould said.

“The strong commodity representation in particular may catch the attention – and draw the ire – of those investors who run strict ethical, social and governance (ESG) screens before they decide how best to allocate their capital according to their personal investment strategies, time horizon, target returns and appetite for risk.”

The companies with the highest dividend yield include Phoenix Group, at 11%; Vodafone, at 10.8%; and British American Tobacco, at 10.6%. Seven FTSE 100 companies hold a dividend yield at 8% or more.

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