FTSE 100 dividend growth continues to dry up amid buyback boom

Dividend growth for the FTSE 100 has staggered to a halt in 2025, slipping from its all-time high in 2018 as UK companies instead favour buybacks.

FTSE 100 firms are expected to payout some £80.4billion in 2025, down from a previous forecast of £83billion three months ago.

This is a forward dividend yield of 3.5 per cent for the current year, according to investment platform AJ Bell.

These dividend payments represent an increase of just two per cent compared to 2024. In 2018, FTSE 100 dividends hit an all-time high of £85.2billion.

This stagnation in dividend growth comes as the UK's largest firms increasingly choose to carry out share buybacks instead of dividends as a way to return value to shareholders.

Historically, the opposite has been the case, with UK firms generally having favoured dividends in the past.

Russ Mould, investment director at AJ Bell, said: 'In terms of dividend growth, analysts seem to think that big increases will be a relative rarity in 2025, perhaps because buybacks are playing a big role in capital allocation plays – a board and chief executive are likely to draw less flak for a pause in a buyback than they are for a dividend cut.'

Mould added: 'Investors also need to bear in mind the role of the pound, whose strength against the euro and particularly the dollar this year reduces the value in sterling terms of the dividends declared in those currencies by no fewer than 28 current members of the FTSE 100.'

Cutting a dividend is often seen as a bad sign for the company making the move, especially if the dividend has previously been increasing consistently. The same is not so much the case with buybacks.

So far, FTSE 100 constituents have declared some £39billion in share buybacks, well over half of last years record figure.

Buybacks can generally be taken to mean a company thinks its own shares are undervalued, though of course company bosses aren't always right.

In 2024, the same firms bought back more than £58billion, setting a new record high.

Companies buy their shares back in order to reduce the number outstanding and boost their earnings per share. Repurchased shares can be cancelled or held in treasury by the company.

Together with dividends, the uptick in buybacks means the total expected payout from the FTSE 100 will be £119.4billion.

AJ Bell said the total payout of buybacks and dividends combined equates to a cash yield of 5.25 per cent of the index's £2.3trillion valuation.

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Mould said: 'That cash yield beats inflation, the 10-year gilt yield and the Bank of England base rate which, on balance, still seems set to go lower before it goes higher once more.

With the increase in buybacks, the FTSE 100's attractive dividend yield is now falling onto the shoulders of just a small number of the index's constituents.

Mould added: 'For income-seekers, the FTSE 100's yield may be a key part of the UK stock market's appeal, but investors must be aware of how the forward yield is shrinking as the index makes gains and dividend payments gently decline.

'There also remains a fair degree of concentration risk within the UK's headline index.'

The top ten dividend payers in the FTSE 100 are expected to pay out 53 per cent of 2025's total, giving back £42.4billion to shareholders.

The top 20 firms combined will pay out 69 per cent, around £55.7billion, of the estimated total.

NatWest is forecast to grow its dividend the most, by £532million in 2025, with Unilever increasing its dividend by an expected £210million, while Admiral will boost its own by £177million.

Meanwhile, a number of firms are keeping their dividend growth consistent, with Severn Trent, Coca-Cola HBC and LondonMetric Property have all increased their dividends consistently over the past nine years, meaning they are set to join the 17 firms in the index that have dividend increase streaks of more than a decade.

Just nine of these firms were in the FTSE 100 ten years ago.

Mould said: 'If anything, history suggests that it is dividend growth that is the real nectar for share price, as a growing pay-out will drag it higher over time.'

'Any investor looking for the next generation of dividend growth winners may need to dig into the FTSE 250.'

However, notably absent are any special dividend declarations so far this year. In 2024, HSBC, Fresnillo, Berkeley Group, Associated British Foods and Admiral all declared these, distributing a combined £3.7billion to shareholders.

Mould said: 'Any similar distributions could further top up the cash pot, as could any merger and acquisition activity.

'A predator is yet to circle a FTSE 100 member in 2025, but buyers of UK assets have tabled bids worth a total of £20 billion already this year, after £49 billion-worth of successful approaches in 2024.

'Takeover deals can therefore also add to the total return from the UK equity market overall.'