FTSE 100 volatility in 2023 has driven share prices across the index through the floor. Worries over rising interest rates and weak economic growth have hammered investor confidence and damaged demand for UK shares.
Lloyds Banking Group’s (LSE:LLOY) share price, for example, has dropped a meaty 4% since the beginning of the year. Mining giant Glencore’s (LSE:GLEN) descent has been even more severe, with its share price down 16% over the period.
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The effect is that dividend yields for these blue-chip stocks are now well above the 3.8% FTSE forward average. Lloyds’ prospective dividend yield sits at 6.3%. Glencore’s corresponding reading registers at an even better 8%.
But which — if either — should I buy for my UK shares portfolio today?
Dividend outlook
First let’s consider the robustness of current dividend forecasts. Profits and cash flows at both these companies are sensitive to broader economic conditions. So in the current climate both are clearly in some peril.
But despite this, I think there’s a good chance Lloyds shares could deliver the dividends City analysts are expecting. Predicted payouts are covered 2.7 times by expected earnings. This provides a wide margin for error and smashes the accepted safety benchmark of 2 times.
The Black Horse Bank is also well capitalised which could help it pay those big dividends. Its capital equity 1 (CET1) ratio stood at a robust 14.1% as of March. And this week, Bank of England stress tests gave the firm’s balance sheet a clear bill of health.
Dividend forecasts for Glencore shares by comparison appear a bit more vulnerable. Dividend cover comes in at just 1.5 times for 2023. That said, the mining giant also has a strong balance sheet to help it meet analyst City estimates.
A significant debt-cutting policy last year left it with net shortfall of just £75m as of December. This was down from a massive $6bn a year earlier, and resulted in a net-debt-to-adjusted-EBITDA ratio well below 1.
The verdict
So which would be the better buy today? The threat to Glencore is that commodities demand could dive as interest rates steadily rise. Lumpy economic data from its key market, China, already suggests earnings could disappoint.
Yet I’d still happily buy this FTSE share following recent share price weakness. I think its price will rebound strongly once central banks’ tightening cycles draw to a close. Demand for its iron ore, copper and other raw materials could soar as the growing emphasis on the green energy revolution in emerging markets intensifies.
On the other hand, Lloyds is a share I plan to avoid. Okay, the FTSE bank looks in great shape to pay a big dividend in 2023, as profits are supported by rising interest rates. But it also faces several major threats that could drag its share price lower and weigh on dividends further out.
Britain’s economy looks set for a prolonged period of economic weakness. It’s a scenario that could hammer revenues growth at Lloyds and result in elevated levels of loan impairments. Growing market competition adds to the stress and means the bank could struggle to record solid earnings growth over the long term.
All things considered, I’d much rather buy Glencore shares when I have cash to invest.
