The FTSE 100 may have hit new highs in recent weeks, but there is a tougher reality behind the jubilant headlines. Until recently, the UK stock market had been in the doldrums, unloved by domestic and international investors. However, a combination of merger and acquisition activity, share buy back activity and an improving domestic economy may be helping it revive.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
In recent years, investing in UK companies has been tough. Although many companies continued to perform well operationally, share prices remained stubbornly low. Low share prices were not enough by themselves to tempt investors back to the UK market.
However, a number of factors appear to be starting to make a difference. There has been significant buyback activity. Buybacks are where a company buys its own shares back from the market, reducing the total number of shares outstanding. Shell announcing a $3.5bn buyback at the start of May,1 alongside many of the other major FTSE 100 companies including BP,2 Unilever,3 Barclays,4 and HSBC.5 By reducing the number of shares in issuance, buybacks should make each share worth more.
Merger activity
At the same time merger and acquisition is picking up, with a number of high profile bids for UK companies, including Anglo American, Direct Line and Currys6. US private equity investors are taking a growing interest in UK companies, apparently recognising that there is value there.7
All of these factors are also true for the small and mid-cap part of the market. They have suffered most from the general unpopularity of the UK market and now appear cheap relative to their own history and to their international peers. They are also seeing both buyback and takeover activity, which is helping to support share prices and are an important source of potential growth and income for UK investors.
Dividend strength
While we believe we may be on the cusp of a revival for the UK stock market, predicting when and how that revival will build momentum is difficult. This is where dividend stocks come in. A focus on growing dividends can provide a measure of stability and predictability in various market cycles. It is also a source of potential long-term growth, compounding over time, until share prices recover.
The dividend yield on the UK market is higher than almost any other major market. The FTSE 100 has a yield of 3.6%8. The FTSE World index, for example, has a yield of 1.9%.8 However, investors are not confined to larger capitalisation companies when looking for income. The FTSE Small Cap has a yield of 4.0%8. The FTSE 250, which represents medium-sized UK companies, has a slightly lower yield, but still holds income opportunities. In effect, investors in the UK market can target traditionally higher growth areas such as smaller companies, but could still receive a growing dividend.
It is worth noting that this dividend income could grow over time. Dividends in the UK market are currently growing at around the longer-term rate of inflation, at 2-3%9. On the BlackRock Income & Growth Investment Trust, we specifically seek out companies that are growing their dividend faster than the market. These dividend growth stocks are likely to have sustainable cash flow, which puts them in a position to grow their payouts over time.
There is one final piece of the puzzle that may help UK companies at the margin. There is growing political will to reinvigorate the UK market. Ahead of the election, both Labour and the Conservatives have made it clear they recognise the problems, and want to find solutions. Both sides are looking at ways they can harness pension fund capital to support the UK market, and encourage greater activity.10 11
We believe targeting growing dividends can guide investors to companies with stable, long-term growth and capital discipline. This should be a more productive strategy than targeting the highest dividends and helps us identify companies with growth and stability. Ultimately, there are reasons to be hopeful about the outlook for the UK market, but in the meantime, dividends allow us to wait until the market recognises the value in UK companies.
Sources:
1 The Guardian - Shell unveils new £35bn share buy back - May 2024
2 Morningstar - BP Shares surge after earnings and buybacks - Feb 2024,
3 Nasdaq - Unilever commences share buyback program - May 2024
4 Barclays - Commencement announcement - April 2024
5 Morningstar - HSBC launched $2bn buyback - February 2024
6 This is Money - The £60bn foreign takeover frenzy - May 2024
7 Private Equity Wire - US PE acquisitions of UK businesses up 35% in past year – 3 May 2024
8 FT - markets data - May 2024
9 Computershare - Dividend Monitor, Q1 2024 - April 2024
10 House of Lords Library - King’s Speech 2023: Pensions - November 2023
11 The Guardian, Rachel - Reeves plans pensions reform as part of Labour’s growth plan - November 2023
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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
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