Persimmon, Lloyds, and National Grid could be attractive FTSE 100 dividend stocks for October as monetary and fiscal policy diverge.
Two pieces of major UK economic news are hitting the headlines this week. The first is the Bank of England’s decision to hike the base rate by 50 basis points to 2.25%.
While less hawkish than its Stateside counterpart, the Bank nevertheless has warned that the UK is already in a recession that could last until the end of 2023.
FTSE 100 dividend stocks: bifurcating fiscal and monetary policy
It’s worth noting that Sterling is already at a multi-decade low. PM Liz Truss has introduced an energy bills intervention for individuals and businesses that could cost as much as £150 billion over the next two years, and potentially more as international market prices have no cap.
The second, Friday’s ‘fiscal event,’ which will not be accompanied by an Office for Budgetary Responsibility economic forecast, is set to increase the deficit further. Taxes of all kinds could be drastically slashed, including those for corporations, income, dividends, stamp duty and even inheritance.
Institute for Fiscal Studies Director Paul Johnson believes the mini-budget will be the ‘biggest tax cutting fiscal event since Nigel Lawson’s Budget of 1988.’ The influential think-tank believes the plan will increase the public deficit by an ‘unsustainable’ £100 billion a year, even after energy bill subsidies subside.
Further, it suggested that it would take a ‘miracle’ for the UK to see growth increase faster than the increased debt burden. In addition, the Bank’s Monetary Policy Committee warns the fiscal event could affect the economic outlook in a ‘material’ way.
This leaves the UK economy in a delicate position. On one hand, the Bank of England, which gained political independence in 1997, is set on a path of tightening monetary policy to control inflation. Meanwhile, the new governing administration is set on loosening fiscal policy, to promote growth.
While CPI inflation is now expected to rise to only 11% as a result of the energy intervention, the end result could well be interest rate rises that exceed 5% by mid-2023.
Indeed, the MPC saw a Mexican stand-off whereby five members voted for the 50 basis points rise, three for 75 basis points, and one for just 25 basis points. This points to what the British Chambers of Commerce calls an ‘increasingly tricky balancing act’ to equilibrise inflation and consumer confidence.
With interest rates set to rise as taxes are cut, these three best FTSE 100 dividend stocks could stand to benefit. Of course, as with all high-yield dividend stocks, sustainability is a key question.
Further, many will choose to keep hold of excess cash as interest rates rise and new debt becomes more expensive.
1) Persimmon (LON: PSN)
Persimmon shares are down 52% year-to-date to just 1,383p, leaving the UK housebuilder with an exceptional 17% dividend yield.
At first glance, this sell-off appears nonsensical. According to the ONS, the average UK house price has surged by 15.5% over the last year alone to £292,000. And longer term, prices have remained on an upwards trend, as demand continues to exceed supply, both among owner-occupiers and investors.
With interest rates rising, perhaps to 5% by mid-2023, Capital Economics is predicting a 7% fall over the next two years. But even this fall would leave UK house prices above historical averages.
Further, Persimmon’s share price could now be an excellent buying opportunity given the expected announcement of a Stamp Duty holiday tomorrow. The last holiday, incited by former Chancellor Rishi Sunak, was seen as instrumental in the rocketing prices during the pandemic era.
Policy details will be key to Persimmon’s prospects; a one-year time-limited holiday could well counteract rising rates to some degree, at least until inflationary heat comes out of the wider economy.
The FTSE 100 company delivered 6,652 homes in H1, down from 7,409 in H1 2021. But it argues that ‘demand across the UK remains strong,’ and is 75% forward sold for the full year.
2) Lloyds (LON: LLOY)
Lloyds shares are by far the most highly traded FTSE 100 stock, as the ‘big four’ bank is widely seen as the benchmark for the UK’s economic health.
Despite significant volatility, Lloyds is up 9% over the past year to 48p as investors weigh the benefit of rising interest rates generating increased income for the UK’s largest mortgage lender against the risk of widespread global recession.
Like Persimmon, Lloyds’ fate is tied to the UK housing market, especially as it does not operate internationally. Loans and advances to customers are at £456.1 billion according to the most recent figures, of which £296.6 billion is comprised of its open mortgage book.
In H1 results, net income rose by 12% to £8.5 billion as its net interest margin increased to 2.77%. Accordingly, it generated statutory profit after tax of £2.8 billion. While this was down from £3.9 billion in the same half last year, this was because of ‘higher net income being more than offset by the non-repeat of the significant impairment release and the deferred tax credit.’
CEO Charlie Nunn thinks the bank’s ‘strong financial performance demonstrates the resilience of our business model and customer relationships...we remain well placed to withstand the current macroeconomic uncertainty and continue to generate significant capital for our shareholders.’
As interest rates rise, so too could the FTSE 100 bank’s 4.5% dividend yield. Moreover, it has an attractive price-to-earnings ratio of just 7.9.
3) National Grid (LON: NG)
At 1,030p, National Grid shares are up 8.7% over the past year. Already popular among FTSE 100 investors by virtue of its defensive nature, the infrastructure stock now boasts a 5% dividend yield. And its dividend has not been cut in the past 26 years, displaying its gravity-defying defensive status.
National Grid operates gas and electricity transmission networks, predominantly in the UK, but also in Eastern US. Accordingly, it’s not exposed to wholesale energy prices in the same way as suppliers like SSE and Centrica.
Even so, the new PM has categorically ruled out further windfall taxes that could have hit National Grid alongside other energy sector stocks. And the company is growing, having among other investments and divestments, acquired Western Power Distribution, the UK’s largest distributor, for £7.9 billion last year.
In full-year results, National Grid’s £4 billion underlying operating profit was up 11% on a pro forma basis. Accordingly, earnings per share rose by 10% to 65.3p, and National Grid’s dividend grew by 3.7% to 50.97p.
However, CEO John Pettigrew has warned that ‘the world has changed dramatically over the last year, with the tragic war in Ukraine, a global economic slowdown, and rapidly rising inflation.’
In addition, it is investing a whopping £24 billion to decarbonise UK energy networks over the next five years. This could pose a risk to the dividend if the recession worsens. Risks of energy rationing or power cuts also hover in the background.
Trade and invest in over 17,000 UK, US and global shares from zero commission with us, the UK’s No.1 trading provider.*