FTSE 100 Set to Yield 5% in 2019

Dividends paid by UK companies should break the £100 billion mark in 2019. The stock market's forecast 4.8% yield will be the highest since the financial crisis

David Brenchley 21 January, 2019 | 10:48AM
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Sterling, pound, cash, dividends, dividend yield, FTSE 100, FTSE 250, UK dividends

Dividends paid by listed UK companies is predicted to smash through the £100 billion mark in 2019. The yield on UK shares has now reached a near-decade-long high, according to research by Link Asset Services.

Firms in the UK paid out a record headline £99.8 billion to shareholders in 2018, the shareholder services group’s latest Dividend Monitor shows, up 5.1% from 2017. Underlying dividends, which exclude special payouts, grew at a faster rate at 8.7% to £95.9 billion.

After continued stock market turbulence, the blue-chip FTSE 100 index, which lost 8.7% in value last year, is predicted to yield 5% over the next 12 months. The mid-cap FTSE 250, meanwhile, which was down 13% in 2018, will pay 3.3%.

The average yield of 4.8% on UK shares is the highest figure seen since March 2009, the low point of the global financial crisis. This compares to a 30-year average yield of 3.5%.

The fact that the last time the yield was this high was at the bottom of the credit crunch, and before that during the 1991 recession, may signal trouble ahead.

Should we see a downturn in the economy, company earnings will take a hit, with dividends following. Indeed, with the spectre of a no-deal Brexit still on the cards, that could be the case.

But Justin Cooper, chief executive of Link Market Services, thinks an overly pessimistic outcome is currently priced in to markets. Indeed, the report notes dividends would need to fall by 25% - far more than they did in the financial crisis – to reach the 30-year average yield of 3.5%.

“We still expect 2019 to break new dividend records,” says Cooper. While forecasts aren’t especially bullish, he explains, headline growth should be around 4.2% to £104.1 billion, with underlying growth of 5.3% to £101.1 billion.

UK Stocks Could Be Undervalued

Cooper continues: “While one or two companies face difficulties and the easy wins from the mining sector are behind, a 4.8% yield implies an overly pessimistic view. The current disconnect between the level of dividends being paid and share prices doesn’t obviously mean share prices must rebound any time soon.

“The yield may stay elevated for as long as uncertainty persists, but if the world does sink into a recession in the next couple of years, or Brexit goes badly, the drop in dividends is likely to be in the range of 10-15%, not the 25% or so currently implied by the market.”

The mining sector grew its dividends fastest, at year-on-year growth of two-thirds, while British American Tobacco (BATS) made the single biggest contribution to growth, paying out £900 million more than in 2017.

The return to the dividend list for banks was also a boon, with Royal Bank of Scotland (RBS) paying its first in 10 years, Standard Chartered (STAN) its first since 2015 and Lloyds’ (LLOY) payout reaching its highest level since before the financial crisis.

Of the 17 firms in Morningstar's analyst coverage yielding above 5%, our analysts believe three are undervalued and rate them three stars. Two are in the tobacco sector, with British American and rival Imperial Brands (IMB) yielding 8.5% and 7% respectively.

BATS' share price is languishing at a level not seen since 2011, while Imperial is at a five-year low. Still, analyst Philip Gorham thinks there is upside at current levels of around 74% and 48% respectively.

Babcock (BAB), one of the largest suppliers to the Ministry of Defence, meanwhile, has potential upside of 50%, says Denise Molina. "babcock is one of the main beneficiaries of increases in the UK's defence budget and the UK Government's commitment to increased outsourcing to the private sector," explains Molina.

"While the prospects of a budget shortfall would restrict the Ministry of Defence's ability to fund increases in spending on defence equipment, we believe potential cost-saving programmes will be directed towards non-mission critical services and, thus, will have limited impact on Babcock's support service revenue beyond 2019."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Babcock International Group PLC519.00 GBX-0.29
British American Tobacco PLC2,346.00 GBX0.00Rating
Imperial Brands PLC1,811.00 GBX0.36Rating
Lloyds Banking Group PLC51.58 GBX-0.39Rating
NatWest Group PLC288.60 GBX0.94Rating
Standard Chartered PLC685.80 GBX0.97Rating

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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