Earnings season has wrapped up and the end of the year is fast approaching. Still, there is still enough to keep UK income investors interested as they look ahead to 2025.
British American Tobacco BATS is the only dividend-paying company on our FTSE 100 screen to have updated the market since October, but it’s significant because it has been top of the list by yield since we started running this series in 2019.
The wide-moat tobacco company has a predictable dividend-paying schedule of 58.88p quarterly payouts in May, August, November and February. Three of these payments have already been made.
Investors don’t know what the next schedule will be in 2025 and more clarity will be expected at the next official results for the full year in February 2025. At the company’s capital markets day on Oct. 16, chief financial officer Soraya Benchikh reiterated the commitment to a “progressive dividend” without specifying the exact payouts.
Free cash flow, which gives an indication of how generous an income-company can be, is expected to remain above £8 billion in 2025, having moved above this level in 2022. The company has put a figure on its share buyback scheme, which will rise from £700 million in the 2024 financial year to £900 million in 2025.
Not that a buyback is desperately needed, as the shares are up 30% so far this year, close to breaking through the £30 mark. Rival Imperial Brands IMB has seen an even bigger share price increase, comfortably beating the 7% rise for the FTSE 100 itself.
However, Morningstar analysts assign a fair value estimate of £39 to the BATS shares. After the latest trading update, analyst Kristoffer Inton said: “We didn’t see anything to drive us to change our £39 fair value estimate or wide moat rating. Although our average annual revenue growth forecast of 1.3% from 2024 through 2028 falls well below guidance, we still think the shares are undervalued.”
Upcoming Dividend Payments
• WPP: Nov. 1, interim
• Unilever: Dec. 16, quarterly
• Imperial Brands: Dec. 31, interim
• GSK: Jan. 3, quarterly
• BT: Feb. 5, interim
What Should Income Investors Expect in 2025?
Morningstar Wealth’s 2025 outlook has just been published, and it shines a positive light on UK equities.
“The relative picture is even more compelling with Europe—the UK in particular—making it the most attractive developed markets region globally. Add to this the macroeconomic tailwinds of rising gross domestic product, falling inflation, and lower interest rates, and the picture looks even brighter,” the report said.
Martin Walker, head of UK equities at Invesco, echoes this sentiment in the company’s 2025 outlook:
“We are particularly optimistic for UK equities in 2025. The UK offers exposure to many high-quality companies trading at valuations below global peers, even after taking account of differences in return on capital.
“UK equities offer attractive exposure to the value factor. They also currently offer compelling income streams that together with capital growth can provide a valuable defence against inflation.”
And Goldman Sachs Asset Management also sees opportunities outside the U.S. for investing in cash-generative companies.
“Non-US dividend-paying companies with sustainable returns on invested capital, strong cash flow generation, a track record of capital discipline and consistent payout history also present opportunities; a focus on high-quality businesses and consistent dividend payers may help to mitigate volatility and market drawdowns, which have historically been sharper in international markets than in the US.”
It’s hard to make exact predictions for 2025 in terms of UK dividends apart from to assume modestly rising income paid out by companies as economic conditions improve and interest rates fall. Janus Henderson’s quarterly dividend report looks ahead to next year after a record third-quarter for global dividends.
Can Dividend Growth Continue in 2025?
Ben Lofthouse, head of global equity income and Jane Shoemake, client portfolio manager, said in a recent note that there are reasons for cautious optimism for the global dividend investor:
“Concerns that higher interest rates might cause significant strain the global economy have generally ebbed away. Companies report that it is getting easier to refinance debts and the banks are well capitalized and generating good returns, even as interest rates fall, with bad debts remaining under control.
“Company profitability in most parts of the world looks robust and implies that dividend growth can continue into 2025. Dividends in any case show more steady growth than profits over time as companies seek to manage payout ratios over the business cycle.”
Of course, there are great uncertainties ahead for U.K. and European investors in 2025, such as the impact of U.S. tariffs, weak economic growth and higher-for-longer interest rates.
Current UK Tax Rules on Dividends
The Oct. 30 Budget came with a raft of changes for investors and savers but didn’t change the tax rules on UK dividends, which are:
• No income tax on dividends within the £20,000 ISA allowance, an amount that is frozen until 2020.
• Outside of that the tax-free dividend allowance is £500 in the current tax year, ending April 2025. Dividend tax rates are 8.75%, 33.75% and 39.35% depending on your tax bracket.
• The tax-free CGT allowance is currently £3,000, but outside of that CGT tax has been increased from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers. This has no specific impact on income investors but will impact on those who invest in equities outside of ISA allowances.
Recent Coverage on Dividends
We have recently profiled some wide-moat quality stocks.
Methodology for Dividend Stock Screen
To make it on to our monthly list, FTSE 100 companies need now to have a Narrow or Wide Morningstar Economic Moat Rating, pay a dividend, and have a forward yield of 3% or more. This is below the Bank of England base rate, which still stands at 4.75%. We changed our methodology in 2022, introducing a hurdle of 3%
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
