Back in February, the FTSE 100 hit an all-time high of 8,047 points.
We all cheered the UK’s top index as it pushed past the 8,000 level, and wondered how high it might go by the end of the year.
As I write, it’s back down to 7,600 points. But I think we might still see a new high this year. Let me share why I think Footsie shares are too cheap now.
Dividend growth
Dividends look set to grow this year. It seems 2022 will end up with a small drop. But even then, it would put the index on a dividend yield of 4.2% for that year.
That excludes special dividends and share buybacks, and there have been a good few of those too. So that look like a big cash return to me.
What’s more, according to investment services provider AJ Bell, FTSE 100 dividend payments for 2023 could come in as high as £84.8bn.
Again, that’s without specials. And there are no buybacks included.
Share buybacks
We’ve seen buybacks of more than £22bn announced so far this year, so total cash returns could exceed £100bn.
That £84.8bn in ordinary dividends would come close to the record year of 2018. And in 2024, analysts think dividends will smash though the old record.
If the 2023 total does hit £84.8bn, it would mean a yield of about 4.7%. Total cash returns, including special dividends and buybacks, could exceed 5.5%. That alone, I think, makes the FTSE 100 look cheap.
Earnings rises
What’s the chance that dividends will match up to these hopes? Even though dividends fell back a bit in 2022, the City thinks pre-tax profit for last year should be higher.
They also reckon 2023 will see another rise, to set a new earnings record for the Footsie. And where do they think the biggest gains will come from?
That would be the financial sector, which looks set to outstrip any other sector in 2023 profit growth.
Now, these forecasts are a long way from certain. They’ve been marked down since late last year, and that might well happen again.
Top FTSE 100 shares
But even if this is all a bit optimistic, a look at the valuations of some top shares makes me feel bullish.
Take the banks, for example. Lloyds Banking Group is on a forecast price-to-earnings (P/E) ratio of only a bit over six. And Barclays stands at less than five.
Over among insurance shares, we see Legal & General on a P/E of seven, and Aviva on 7.5.
These are in the same sector that analysts think will lead the FTSE 100’s profit growth this year.
Forecast risk
This all sounds good, though forecasts have a habit of not always coming true. And if inflation and interest rates stay high longer than hoped, then we could be in for another weak year for UK shares.
Still, on balance, this all convinces me that FTSE 100 are undervalued, and that a lot of them could be great buys for long-term investors.
