Dividend payments from FTSE 100 companies are forecast to end the year a whisker away from pre-pandemic levels, according to AJ Bell’s Dividend Dashboard.
The pay-outs from the UK’s largest companies are set to grow by 36% for the year, bringing the total for the year to £84.1bn. The pre-pandemic peak was £85.2bn, set in 2018.
This is significant given the vast amount of dividend reductions and cancelations investors endured during the Covid-19 pandemic, when companies were forced to prioritise cashflow and shore up balance sheets during the lockdown. Last year the total dividend pay-out was just £61.8bn, reflecting the significant impact Covid had on this part of the market.
Russ Mould, investment director at AJ Bell, said the more positive forecast was down to improved corporate profits, cashflows and general increase in consumer confidence.
However, much of the recovery is due to a small number of stocks. Indeed, there are 10 companies responsible for the majority of the dividend recovery.
Miners Rio Tinto, BHP Group, Anglo American, Glencore and Evraz are joined by banks Barclays, Lloyds and HSBC. Telecoms group BT and oil giant Royal Dutch Shell round out the list. Combined they are expected to make 80% of this year’s dividend increase.
Mining stocks dominate the list as these stocks have a positive outlook due to higher industrial metals prices. Mould added some caution though, noting that September’s sharp drops in copper and iron ore could potentially put the lid on this positive forecast momentum if the decline persisted.
AJ Bell added that in 2022’s data the number of mining companies in the top 10 drops down from five to two. Mould said this is when “reductions at several resources plays hold back the overall forecast for the FTSE 100.”
The biggest contributors are Rio Tinto and BHP Group – together responsible for around 40% of the dividend growth among FTSE 100 stocks this year alone.
Mining firm Rio Tinto is expected to be the single biggest dividend payer in the FTSE 100 this year, paying out £11bn with an exceptionally high yield of 17.8%.
Mould said that in the current climate of increased focus on investing sustainably and with environmentally impacts in mind “not all investors will welcome this.” He said there might be added distain for Rio Tinto after their “appalling behaviour” when it destroyed a sacred aboriginal sites as part of a copper mine extension in Australia.
“However, others will welcome how new chief executive Jakob Stausholm is both reforming the company’s governance and cashflow,” Mould said.
While this forecast is overwhelmingly positive there are still some potential headwinds and risk investors need to be aware of.
Ultimately, the picture could be dampened by a “renewed drop in economic activity”, particularly because a large proportion of the FTSE 100 is made up from commodity stocks, miners, oil producers and financials.
“Analysts currently believe that 2022’s (adjusted) net profits will exceed not only the pre-pandemic peaks of 2018 but the current all-time high of 2011, when commodity prices were roaring higher, and miners and oil producers generated 42% of the FTSE 100’s profits between them,” Mould said.
According to AJ Bell’s data, miners, oils and financials will generate more than 80% of 2021’s expected £128bn increase in pre-tax income. The risk comes from these three sectors being sensitive to global economic growth to some degree, Mould said.
“If the economy offers little or no assistance – or even hinders – then these earnings forecasts, and by extension, dividend payment estimates could find themselves exposed to the downside.”
Another risk investors need to be aware of is concentration risk. This is already present in the market due to just a handful of stocks generating the majority dividends and investors have to be careful this isn’t translated to their portfolios.
Just 20 stocks are expected to generate 73% of the total index’s pay out for the year, for example.
“Anyone who believes the UK stock market is cheap on a yield basis and is looking to buy individual stock either via a passive index tracker or a UK equity income fund needs to have a good understanding of, and strong view on, those 20 names in particular,” Mould said.