FTSE 100 dividend forecasts slide amid uncertain climate

After the index’s spring stumble, the FTSE 100 is now expected to yield 4.2% in 2022, with the index’s total dividend pay-out expected to come in at £76.4 billion, before going on to reach £84.8 billion in 2023, excluding special dividends.

Estimates seeped lower from the summer and the first round of full-year results (for those firms with a December year-end) saw lower-than-expected payments from miners in particular. The round of results from companies with March year ends will provide the final tally for 2022.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Despite this disappointment, analysts are, for now, setting aside concerns over increases in input costs, interest rates (and therefore interest bills), a possible recession and even lower oil prices. The consensus estimate implies 11% growth in the total FTSE 100 dividend for the year just begun (and analysts are pencilling in 7% growth for 2024).

If those estimates are correct, the FTSE 100 will not quite match 2018’s record ordinary dividend payment in 2023, but the index will then exceed it and set a new record in 2024.

However, despite earnings cover exceeding 2.00 on the basis of stated profits for 2023 and 2024, analysts do not seem entirely confident in their forecasts. They began 2022 expecting the year to provide £81.2 billion in ordinary dividends but the likely outcome now looks set to be something closer to £76 billion. They have also trimmed estimates for 2023 and 2024. At the end of last year analysts were forecasting an £85.8 billion payout to shareholders in 2023, but expectations have since slipped to £84.8 billion.

This may be because profit forecast momentum is also negative. Aggregate FTSE 100 pre-tax profit forecasts rose sharply in the first half of 2022, from £236 billion to £271 billion, only to then tumble back to £226 billion, as oil and metal prices subsided, input costs rose and financial companies cleaned house and marked assets to market.

At least those mark-to-market downgrades are on paper only and do not affect cash flow. This may explain why profits, and therefore dividends, are seen growing in 2023, despite nagging recession fears and a banking wobble, although that seems to be more of an issue for badly run lenders in the USA and Switzerland, at least for now.

Even after the downgrades late in the year, analysts still believe 2022 will prove to be a record year for stated pre-tax profit from the FTSE 100. The consensus forecast is then looking for a 23% jump in 2023 to a new record £279 billion, helped by a lack of inventory-related adjustments at the oils and mark-to-market moves at the financials and real estate investment trusts.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Buybacks off to a strong start

Forty-one of the FTSE 100’s members ran a buyback programme in 2022 to return additional cash to shareholders and twenty-three index constituents have already announced plans to do so, or began cash returns via this mechanism, in 2023.

FTSE 100 firms announced £55.2 billion of share buybacks in 2022. That is way in excess of the peaks of 2006 and 2018, which came in between £33 billion and £34 billion, and 2023’s announced total already stands at £22.7 billion.

Bank dividends set to surpass 2007 record

The expected hike in HSBC’s pay-out is very noticeable and banks and financials more generally are seen as a key driver for FTSE 100 dividend growth in 2023.

Ten biggest forecast dividend increases and declines in 2022

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Banks are currently expected to distribute £14.6 billion, a figure higher than the £13.3 billion peak seen in 2007, just before the Great Financial Crisis hit home.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Such largesse helps to compensate for the second straight expected drop in miners’ aggregate dividends, which presumably reflects fears that a recession will dent demand for industrial metals.

Source: Company accounts, Marketscreener, consensus analysts’ estimates. Excludes special dividends

Recession risk

The combination of a drop in economic activity – for whatever reason, be it a banking wobble or something else – plus higher interest rates, rising input costs and currency movements could yet provide a stiff headwind to dividend forecasts.

On a stated basis, net income in 2023 is expected to jump sharply from 2022’s £146 billion all-time high before a more modest 3% increase in 2024. However, underlying progress is less impressive and analysts are actually looking for a 2% drop in underlying net income.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Profits growth estimates rely heavily on banks and insurers, while drawing on health care for further support. Miners are expected to have a negative impact on the overall total in 2023.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

That said, an unexpected economic rebound, and one that sparks a sustained increase in commodity prices as inflation takes a grip, could leave oils, miners and – by extension – the FTSE 100’s earning power firmly underpinned.

Ten key companies

Just ten stocks are forecast to pay dividends worth £46.6 billion, or 55% of the forecast total for 2023. The top twenty are expected to generate 73% of the total index’s pay-out, at £62.1 billion.

Anyone who believes the UK stock market is attractive on a yield basis, and looking to buy individual stocks, glean access via a passive index tracker or even buy a UK equity income fund needs to have a good understanding of, and strong view on, those twenty names in particular.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Ordinary dividends only

HSBC is expected to be the single biggest paying stock within the FTSE 100 in 2023, with Shell, British American Tobacco, Glencore and Rio Tinto next on the list.

Ten highest yields in 2023

Investors will have to look carefully at 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, M&G is the highest-yielding individual stock, even allowing for an expected dividend cut, while life insurance giant Aviva is also expected to offer a double-digit yield in 2023.

Source: Company accounts, Marketscreener, analysts’ consensus forecasts, Refinitiv data. Ordinary dividends only

History suggests that it is not the highest-yielding stocks which prove to be the best long-term investments anyway (although the past is by no means a guide to the future).

Often defending a high yield can be a burden for a firm, as it sucks cash away from vital investment in the underlying business or can be a sign that the company is in trouble and investors are demanding such a high yield to compensate themselves for the (perceived) risks associated with owning the equity.

The strongest long-term performance often comes from those firms that have the best long-term dividend growth record, as they provide the dream combination of higher dividends and a higher share price – the increased distribution can over time drag the share price higher through sheer force. A 1p per share dividend on a 100p share price may not catch the eye, but if that dividend reaches 10p in a decade’s time it almost certainly will, all other things being equal.

The ravages of the pandemic and the recession have taken their toll on the ranks of FTSE 100 firms that can point to a ten-year dividend growth history. Two years ago, twenty-four firms were on this list. That number has since dwindled to fifteen, thanks in part to the relegation of both Dechra Pharmaceuticals and Intermediate Capital in the FTSE Russell index reshuffle of December 2022.

Source: Refinitiv data, Company accounts. *Compound annual growth rate. **Source: Marketscreener, consensus analysts’ forecasts

These articles are for information purposes only and are not a personal recommendation or advice.

Forecasts aren't a reliable guide to future performance. Past performance isn't a guide to future performance, and some investments need to be held for the long term.