Dividend payouts by FTSE 100 firms set to rise for first time since 2018

Dividend payouts by FTSE 100 firms are forecast to rise for the first time in three years to nearly £77billion as companies start to recover from the pandemic.

Many of the biggest UK-listed companies were forced to suspend or cut their dividend payments to conserve cash in the wake of the pandemic last year, including banking groups like Barclays and HSBC.

But analysts expect payouts to investors by FTSE 100 firms to bounce back and grow by £15.2billion, or 25 per cent, this year to £76.9billion, according to analysis by investment platform AJ Bell.

Dividend payouts by FTSE 100 firms are forecast to rise for the first time in three years

The recovery in dividend payouts is not expected to continue this strongly in 2022, when analysts forecast a smaller 4 per cent increase, or £2.9billion. Total payments peaked at £85.2billion in 2018.

‘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,’ said Russ Mould, investment director at AJ Bell.

The recovery in dividend payouts is not expected to continue as strong as this year in 2022

The recovery in dividend payouts is not expected to continue as strong as this year in 2022

Miners and banks dominate the top ten dividend increases this year

Mining giants and banks are expected to hand out some of the biggest rises in dividends, with the top ten stocks accounting for around half of all payouts, or £40.2billion. 

Rio Tinto, which sparked global outrage after it blew up two 46,000-year-old Aboriginal caves in Australia to expand an iron ore mine in May last year, is expected to be the index’s biggest dividend payer in 2021.

The world’s largest producer of iron ore is forecast to hand out an extra £4.8billion to shareholders this year, which marks an increase of over 28 per cent on 2020. 

Rio Tinto is expected to be the index's biggest dividend payer in 2021

Rio Tinto is expected to be the index’s biggest dividend payer in 2021

The Anglo-Australian miner benefited from a year of steep rises in the price of commodities, especially iron ore, thanks to strong demand from a fast-recovering China –  and so did BHP Group, the second biggest dividend payer, according to the research.

It comes as iron ore rose in value by almost 85 per cent last year, climbing above $175 a tonne, as demand rocketed from China’s steel industry. But analysts do not expect a repeat of this year’s bumper payouts by miners. 

‘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,’ says Mould.   

To take the third spot is another miner, Anglo American, which is set to pay out £1.74billion, and then come a raft of banks, including HSBC, Barclays, Lloyds and HSBC as well as telecoms group BT, commodities giant Glencore and housebuilder Persimmon.

The big five lenders – Barclays, HSBC, Lloyds, NatWest and Standard Chartered – were forced by the Prudential Regulatory Authority last year to cancel all dividends.

But this spring they announced they would resume the payouts after the PRA gave them the green light 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 £15.3billion total increase in FTSE 100 dividends in 2021,’ says Mould. 

‘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.’

Total dividend payments peaked at £85.2billion in 2018, but even 2022 is not expected to return to that level, as firms keep recovering from the pandemic, according to the report.   

The ten firms set to have the highest yields in 2021

Rio Tinto is also the highest-yielding individual stock at present, closely followed by BHP, with yields of 12 per cent and 9.2 per cent respectively. 

Tobacco companies Imperial Brands and British American Tobacco are also in the top ten list, along with Persimmon, insurer Admiral Group and mining company Evraz.

Highest yielding stocks: But investors should be wary of yields in excess of 10%

Highest yielding stocks: But investors should be wary of yields in excess of 10%

But Mould warned investors over some companies, like Evraz, which promised high yields and but then cut dividends.

‘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,’ he says. 

He mentions Vodafone, Shell, Evraz, as well as Royal Mail, Marks & Spencer and Centrica – when they were still in the FTSE 100.

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

Dividend cover is finally improving

Dividend cover, which indicates the amount of profit a firm makes divided by the dividend it pays out to shareholders, is improving as companies emerge from the economic downturn.

As a rule of thumb, a dividend cover below 1 should ring alarm bells as it means a company is paying out more to shareholders than it makes in that year, while a cover of 2 or more is ideal as it means a company’s profit is double the amount is paying out to shareholders.

The aggregate earnings cover ratio for the FTSE 100 is now seen rising to 1.83 times in 2021, up from 1.41 in 2020. 

Share buybacks are supplementing dividends

Another way to return cash to shareholders is through share buybacks, and more FTSE 100 firms are starting to deploy them. 

Some 12 FTSE 100 companies have announced share buybacks with an aggregate value of £7.2billion. 

They are Barclays, Berkeley, BP, CRH, Diageo, Ferguson, NatWest, Rightmove, Sage, Standard Chartered, Unilever, Vodafone – and Rightmove has yet to confirm the sum involved.

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 £714million between them, according to the report.

‘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,’ says Mould.

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

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