Rio Tinto, Vodafone and Legal & General could constitute the three best FTSE 100 dividend shares to buy next month.
The FTSE 100 has been the breakout star of the past year, rising above the symbolic 8,000-point high watermark last month, before retreating to 7,542 points today. Of course, twin crises in the form of the American regional banking sector and the near collapse of Credit Suisse as rising interest rates deal their damage are affecting stocks worldwide.
One common misconception is that the UK’s largest companies are dependent on the UK’s economy. But unlike the domestically focused FTSE 250, Telegraph analysis shows that only 22% of revenues were derived from the UK in 2022, with 25% generated in the US alone.
Accordingly, the FTSE 100’s highest-yielding dividend stocks are more subject to US interest rate decisions, the mining supercycle, and global oil supply rather than domestic UK concerns. For example, inflation has unexpectedly risen slightly today — and the index has neither fallen nor risen.
One key issue is that the UK is starting to look unattractive as a place to invest. Chip designer ARM has chosen to launch its proposed $40 billion IPO in the US, £30 billion buildings materials company CRH is moving stateside, and Flutter Entertainment — the largest listed betting outfit in the world — is planning a secondary listing across the pond.
Moreover, biotech sensation Oxford Nanopore, which floated in London at a £3.4 billion valuation two years ago, might be moving abroad. AstraZeneca is siting its new £320 million state-of-the-art manufacturing plant in the Republic of Ireland instead of the UK, and Legal & General’s outgoing CEO Nigel Wilson has warned that the UK has become a ‘low growth, low wage’ economy.
And Shell is considering quitting Europe for the US.
Over the longer term, this could see the UK’s best dividend stocks move overseas entirely. But until they do, there remain some excellent opportunities on the FTSE 100.
Best FTSE 100 dividend stocks
1. Vodafone (LON: VOD)
At 91p, Vodafone shares have fallen by 53% over the past five years. With a dividend yield of 8.5%, this could represent an attractive entry point for value-focused investors.
Deutsche Bank analyst Robert Grindle has a price target of 185p on the FTSE 100 stock and thinks that the ‘underlying value is compelling and the company is taking significant steps to revealing it — though it will take a while for improving business trends to become apparent.’
He’s supported in his view by Bank of America analysts who have a target of 131p and argue that the shares look oversold given falling energy prices, and its strategy of price rises and cost-cutting.
Liberty Global recently took a position worth 4.9% of the company for £1.2 billion, with CEO Mike Fries noting that it was an ‘opportunistic and financial investment.’
The key problem with Vodafone is that the telecoms operator’s positive moves to consolidate its position — whether through M-PESA in Africa or selling its Hungarian operations — are taking time to affect the share price.
But investor impatience could be a gift to those looking to enter now.
2. Legal & General (LON: LGEN)
Legal & General shares have fallen by 15.4% over the past year to 236p, but this quality FTSE 100 dividend company now boasts an index-beating yield of 13.8%.
March’s FY22 results saw operating profit rise by 12% to over £2.5 billion, with a return on equity of 20.7%. The all-important Solvency II coverage ratio stands at 240% as of the start of March, a sizeable increase on the 187% of 2021. And the full year dividend rose by 5% last year to 19.37p.
Wilson enthuses that ‘our diversified and highly synergistic business model continues to deliver significant benefits. Our balance sheet is strong and highly resilient, with a record solvency ratio of 236% and we have once again received 100% of cash flows due from our Direct Investments.’
In the long term, it’s worth bearing in mind LGEN’s fundamental market position. The company has over 10 million customers and exceptionally strong brand recognition, meaning it is able to grow market share even in the highly competitive world of finance. And it’s perfectly placed to benefit from the aging populations in its key markets as they turn to LGEN’s pensions, annuities, and equity release products.
3. Rio Tinto (LON: RIO)
Up 49% over the past five years to 5,300p, Rio Tinto shares still boast a 7.7% dividend yield. However, the miner has seen shares fall since full-year results in late February after it generated only $16.1 billion in net cash from operating activities – a 36% fall on the record set in FY21.
However, it remains a dividend machine, returning $8 billion for the full year representing 60% of total underlying earnings.
CEO Jakob Stausholm notes that Rio’s ‘operational performance has improved, as evidenced by a number of second half records being set at our Pilbara iron ore mine and rail system. We are also investing for the future, doubling our stake in the Oyu Tolgoi copper-gold project in Mongolia through the acquisition of Turquoise Hill Resources, progressing the Rincon Lithium Project in Argentina and reaching milestone agreements that underpin the long-term success of our Pilbara iron ore business.’
Rio Tinto could be one of the prime beneficiaries of China’s reopening given that Refinitiv data shows circa 60% of global iron ore exports are destined for the country. Despite China’s National Development and Reform Commission warning against speculation in the market and issuing fresh production curbs on major Chinese steel cities, the laws of supply and demand could see iron prices rise again in 2023.
In addition, the FTSE 100 miner could benefit from rising copper prices. Trafigura co-head Kostas Bintas has highlighted the metal ‘as the most critical metal globally given the shortage in the market. We only had 3.5 days of copper stock equivalent at the end of last year.’ The analyst thinks the metal could reach a new record of over $12,000/tonne within the next 12 months.
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