Shell, Legal & General, Rio Tinto, and Glencore could constitute the four best FTSE 100 dividend shares to watch next month.
The FTSE 100 has experienced an uncharacteristically volatile 2023. The UK’s premier index started the year at 7,554 points, rose above the symbolic high watermark of 8,000 points by mid-February, crashed to 7,335 points in mid-March, and has recovered to 7,774 points today.
There are a few reasons for this volatility — but few of them are UK-related. Unlike the domestically focused FTSE 250, the share prices of the best FTSE 100 stocks are predominantly influenced by external factors. Indeed, FTSE Russell data shows that circa 82% of the revenue generated by FTSE 100 companies is derived from overseas.
This isn’t particularly surprising when considering the make-up of the largest FTSE 100 stocks. The two oil majors — BP and Shell — in addition to the banks and the miners overwhelmingly dominate, and these companies are affected by shifting geopolitics, global inflation, changing monetary policy, and rising commodity prices far more than any domestic fiscal or economic factors.
Other sources of volatility affecting the index include the SVB and Credit Suisse-induced banking crisis, in addition to the ongoing Ukraine War, Sino-US tensions, and pandemic-induced supply chain crunch.
Whether the world swerves the previously anticipated global recession will be key to the FTSE 100 regaining lost ground.
One key problem is that the UK is becoming a less friendly investing environment, with rising corporation tax — including the windfall tax — together with the end of the super-deduction seeing companies ranging from ARM to CRH to Flutter to Shell looking to list abroad.
For context, AstraZeneca’s recent decision to build its new £320 million state-of-the-art manufacturing plant in the Republic of Ireland instead of the UK is a direct result of uncompetitive taxation policy, according to the FTSE 100’s largest company.
Finally, it’s worth noting that the FTSE 100 outperformed its international peers admirably in 2022, even seeing a small rise in the year. Even accounting for the recent drop, the index remains 2.9% higher than at the start of the year as investors flee to the safety of its defensive dividend stocks.
This is not a bad strategy — but comes with some risk of overvaluation, as many investors will return to US growth companies when the recovery comes.
In addition, some of the highest dividend yields by current valuations, such as Persimmon, look extremely attractive, but yields are calculated on a historical basis — and if a depressed share price is leaving a company with double-digit dividend yield, there’s often a good reason why.
FTSE 100 dividend stocks
1. Shell (LON: SHEL)
Shell's FY22 adjusted earnings came in at $39.9 billion, a huge rise over the previous record of $28.4 billion in 2008, and more than double the $19.29 billion earnt in 2021. The company has announced a $4 billion share buyback program to be completed by early May, and a 15% dividend share increase for the fourth quarter.
While the windfall tax is costing some profits, it’s worth noting that Shell only derives 5% of its income from the UK. The key risk instead comes from macro factors — the cure for high oil prices has ever been high oil prices, and recent OPEC production cuts to keep prices elevated may only work for so long.
At 2,425p, the FTSE 100 dividend stock has a price-to-earnings ratio of just 5.3. Q1 results are due on 4 May.
2. Legal & General (LON: LGEN)
Legal & General's shares have fallen by 9.7% over the past year to 244p, but this quality FTSE 100 dividend company now boasts an index-beating yield of 7.9%.
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.
CEO Nigel 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.’
Wirth strong brand recognition, 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 45% over the past five years to 5,475p, Rio Tinto shares continue to boast a 7.4% dividend yield. But the FTSE 100 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.
And CEO Jakob Stausholm notes that Rio’s is ‘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.’
Like Shell, Rio is intrinsically tied to global demand — most importantly for iron ore, which itself is dictated by Chinese demand.
4. Glencore (LON: GLEN)
Glencore shares have fallen by 13.9% year-to-date to 469p, leaving the FTSE 100 miner with an attractive dividend yield of 10.1% for new entrants.
Recent full-year results saw record profitability — adjusted EBITDA rose by 60% to $34.1 billion, net income increased by a whopping 248% to $17.3 billion, and cash generated by operating activities increased by 97% to $32.9 billion.
The diversified FTSE 100 business was supported by higher energy prices, increased sales volumes, and relatively favourable forex conditions. Having paid down virtually all debt, the company is looking to return $5.1 billion in dividends to shareholders, and it is also buying back more shares.
With Goldman Sachs predicting that commodities will rise by 43% in 2023, there could be further rewards this year. The company’s pursuit of Teck Resources — which valued the proposed acquisition at $23 billion — could end with a decent outcome for both, despite the latter’s recent rejection.
Glencore proposes to create two businesses; CoalCo which will comprise all coal assets, and MetalsCo, which will focus on energy transition metals such as copper and lithium. GLEN anticipates that a merger could see total synergies between $4 billion and $5 billion, an excellent outcome in a high-inflationary environment.
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