Phoenix Group, M&G, and British American Tobacco could be the three best FTSE 100 dividend shares to watch next month. These shares are currently the highest yielding on the index.
The FTSE 100 continues to remain volatile in 2023, having fallen to 7,412 points on 4 October but recovering to 7,601 points today. This mirrors similar peaks and troughs experienced throughout the year, perhaps reflecting the volatility not just in the UK, but in the international markets where most FTSE 100 corporate income is derived.
So far this month, the best FTSE 100 dividend stocks have been affected by three key pieces of news:
First, Metro Bank — which has been struggling for some time — was forced to agree a £925 million rescue package. Investors in FTSE 100 banks and perhaps the wider fintech sector may now be looking nervously for the next problem.
Second, the Hamas attacks on Israel and subsequent response have driven the oil price higher for myriad complex reasons. One component is that a US-backed deal to bring Saudi Arabia and Israel closer together, which would have included increased Saudi Arabian oil output, is now unlikely to come to fruition anytime soon. Another is that Israel has been forced to suspend production at its Tamar gas field for fear of Hamas rockets.
Third, the International Monetary Fund announced today that it now expects the UK to have the highest inflation and slowest growth within the G7 economy in 2024. While this prediction came with some caveats, and the outfit’s past predictions regarding the UK last year were perhaps off the mark, FTSE 100 investors may be concerned.
But the best FTSE 100 dividend shares continue to pay out inflation-beating returns. As a caveat, the following three shares are simply the highest-yielding stocks and may or may not be capable of paying out these outsized returns sustainably.
Past performance is not an indicator of future returns.
Best FTSE 100 dividend stocks to watch
1. Phoenix Group
With an 11% dividend yield, Phoenix Group shares may be tempting to value investors as the FTSE 100 insurer has fallen by 23.2% year-to-date to 473p. For context, the company paid out 50.8p to investors last year — and the average analyst expectation is for 52.6p in 2023.
In H1 results, the company saw cash generation of £898 million, above expectations, allowing the company to boost its interim dividend by 5% to 26p per share. Given that the company is on track to generate £1.3 billion to £1.4 billion of cash generation for the full year, the dividend may appear safe for now — especially with its solvency II ratio of 180% at the top of the 140-180% management target.
However, there are risks. Its bonds are likely falling sharply in value as rates continue to rise, and Phoenix also has its own debt pile to manage. JP Morgan analysts have cut their price target from 655p to just 430p, and downgraded Phoenix to underweight, arguing that ‘the stock has too much debt leverage relative to peers, which creates numerous capital and growth risks in the long term.’
M&G is fast becoming a popular FTSE 100 dividend stock among some investors. The savings and investment provider plans to generate operating capital of £2.5 billion by the end of 2024.
Happily, the company has now achieved 53% of this three-year target 18 months in — remaining firmly on track. And its shareholder Solvency II Coverage ratio remains at the top end of the target range at 199%, with no defaults in the first half of the year. Yet even having risen by 4.4% year-to-date, it still boasts a double-digit dividend yield of 10%.
In half-year results, the company saw positive net client inflows of £700 million — remaining positive into a third consecutive year. M&G also saw operating capital generation rise by 17% year-over-year to £505 million, driving adjusted operating profit 31% higher to £390 million. Accordingly, it also managed to increase its interim dividend by 5% to 6.5p per share.
CEO Andrea Rossi enthuses that the results ‘demonstrate the underlying strength of our business model, the resilience of our balance sheet… we have made progress against all three pillars of the strategy that we launched in March – maintaining our financial strength through capital discipline; mobilising the Transformation programme to simplify our business and improve client outcomes; and delivering growth with positive net client inflows.’
3. British American Tobacco
British American Tobacco is one of the world’s largest tobacco companies, boasting a brand portfolio including Lucky Strike, Dunhill, and Pall Mall. It’s also highly defensive given the addictive nature of nicotine.
And the FTSE 100 stock offers a 9.2% dividend yield after falling by 23.8% year-to-date. Despite ESG concerns, this dip may be attractive to income investors.
The company is investing heavily in alternative products such as vapes as governments continue to crack down on smoking, though most profits are still derived from traditional products. In half-year results, overall revenue rose by 4.4% driven by these ‘new categories,’ whose revenue rose by 26.6%. Accordingly, BATS is making good progress on its long-standing target to generate £5 billion from this sector by 2025.
New CEO Tadeu Marroco is ‘pleased with the resilient performance of BAT in the first half of 2023 and the renewed sense of energy across the organisation...I remain confident that New Categories will deliver a positive contribution in 2024. However, we do not expect contribution growth to be linear, as levels of investment will align with the phasing of our big innovation platforms.’
However, the company continues to face regulatory problems; the UK is planning to ban single use vapes and both the government and the opposition have confirmed support for a phased ban of traditional tobacco products. It also faces the wider fall in smoking worldwide, and a large debt pile as rates rise.
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