We recently compiled a list of the 10 Best FTSE Dividend Stocks To Buy Now. In this article, we are going to take a look at where Smith & Nephew plc (NYSE:SNN) stands against the other FTSE dividend stocks.
The first half of 2024 has been notable for the UK equity market, as the FTSE 100, the benchmark index for UK company shares, hit a record high. However, stocks tumbled in the first week of June as financial shares mirrored broader losses in European markets. That was mainly due to the political uncertainty that unsettled investors and a slump in industrial mining stocks further dragged down the market. That said, with some time remaining in the general elections, there is still some potential for additional developments and surprises within the UK market. The index is up by nearly 6% this year so far, compared with a 14.3% return of the broader US market
The Bank of England (BoE) was one of the first central banks to begin increasing interest rates after the peak of the COVID pandemic. From December 2021 to August 2023, it raised the bank rate by 515 basis points to a 16-year high of 5.25% in order to address rising inflationary pressures in the economy. According to a Reuters poll of economists, the BoE is expected to begin cutting interest rates in August. Most economists also anticipate at least one more rate reduction this year, despite ongoing high inflation in wages and services. Yael Selfin, chief UK economist at KPMG, made the following comment on the situation:
“While we are seeing some tentative signs of cooling in the labor market, service sector inflation remains persistently high and it is likely the MPC would want to wait until the next set of forecasts and a few more data points before it embarks on its first rate cut.”
Overall, UK inflation is expected to remain slightly above the BoE’s target of 2.0% in every quarter until at least the end of 2025, according to the poll. Median forecasts indicated that inflation would average 2.5% this year and 2.2% next year.
After reaching new highs in 2024, the FTSE 100 may attract more investors, particularly those focused on income accumulation. The projected dividend yield of 3.8% for 2024 and 4.1% for 2025 is appealing, especially since these yields surpass the current inflation rate. Analysts predict that the ten largest dividend-paying companies in the UK will return £43.9 billion to shareholders, accounting for 55% of the total dividends from the FTSE 100. The top 20 companies are expected to contribute £57.4 billion, making up 72% of the total dividends.
In 2023, UK dividend growth of 5.4% aligned with the global average, according to a report by Janus Henderson. This increase was driven by substantial dividend increases from banks and oil producers, although it was tempered by lower payouts from mining companies. The report further mentioned that annual dividends in the UK grew to $86 billion in 2023 from over $63 billion in 2020.
While investors gravitate toward American dividend stocks, some of the best FTSE dividend stocks also offer similar investment opportunities.
Our Methodology:
For this article, we scanned through the list of FTSE stocks and picked dividend stocks from the list. From the resultant dataset, we picked the 10 best FTSE dividend stocks with the highest number of hedge fund investors tracked by Insider Monkey as of Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A healthcare professional putting the finishing touches on a patient’s knee implant in an operating theater.
Smith & Nephew plc (NYSE:SNN)
Number of Hedge Fund Holders: 8
Smith & Nephew plc (NYSE:SNN) is a London-based manufacturing company that specializes in medical equipment. In April, JPMorgan released a list of the best European stocks and added SNN to that list because of the stock’s impressive dividend yield. The company has paid regular dividends to shareholders every year since 1937, which makes SNN one of the best FTSE dividend stocks on our list. It currently offers a semi-annual dividend of $0.462 per share and has a dividend yield of 3%.
Over the past five years, Smith & Nephew plc (NYSE:SNN)’s stock declined by 40%, as its bottom line declined despite the growth in revenue. Despite the declines in net income, Smith & Nephew continued to pay out dividends rather than reinvesting into its business. The company’s 5-year average payout ratio is nearly 90%, with the last several years’ figures exceeding 100%, which implies that the company is taking funds from elsewhere to pay shareholders. Clearly this strategy is not working, as evidenced by the drop in the stock price.
However, the drop in the stock price might present an investing opportunity provided that the company returns to growth. The stock’s trailing twelve-month P/E ratio is 43, which is high, but might be fair for a growth company. In fiscal year 2023, Smith & Nephew plc (NYSE:SNN) achieved revenue growth that exceeded its full-year guidance and significantly improved its trading profit margin despite a challenging macroeconomic environment. The company’s revenue for the year came in at over $5.5 billion, up from $5.2 billion in 2022. Its trading profit also jumped by 7.6% on a year-over-year basis to $970 million. In addition, the company’s ongoing investment in innovation continues to yield results, with nearly half of its 2023 growth stemming from products introduced in the past five years. During the year, the company returned $327 million to shareholders through dividends.
Smith & Nephew plc (NYSE:SNN) has several strengths, including a significant presence in the profitable US market, well-known brands, and appealing products like hip and knee implants. These implants are made using advanced load-bearing technology through a unique manufacturing process. Considering the company’s strong recent performance, investors probably believe that this high P/E is justified. Moreover, they expect the company to continue outperforming in a challenging market environment. Smith & Nephew plc (NYSE:SNN) has given a strong outlook for fiscal 2024. The company expects underlying revenue growth within the range of 5% to 6% and its trading profit margin is expected to be at least 18%.
Oakmark Funds also expects to see growth across Smith & Nephew plc (NYSE:SNN)’s segments. This is what the firm said about the company in its first-quarter investor letter:
“Smith & Nephew plc (NYSE:SNN) is a global medical device manufacturer operating in attractive end markets. The company currently generates the majority of its earnings through its sports medicine and advanced wound management businesses, which command strong market share positions and offer favorable growth prospects. The company’s orthopedics business has historically underperformed its peers, but we are pleased by the decisive actions taken by new CEO Deepak Nath, which we expect will improve growth, margins and return on invested capital for the orthopedics segment. We believe the company is in the early stages of its margin improvement journey and an upgrade of the product portfolio in recent years will drive sustainably higher revenue growth than in the past. We were able to purchase Smith & Nephew shares at a discount to our estimate of intrinsic value, despite the company’s improving fundamental outlook.”
At the end of March, eight hedge funds tracked by Insider Monkey reported having stakes in Smith & Nephew plc (NYSE:SNN), down from 11 in the previous quarter. These stakes have a total value of nearly $35 million.
Overall SNN ranks 10th on our list of the best FTSE dividend stocks to buy. You can visit 10 Best FTSE Dividend Stocks To Buy Now to see the other FTSE dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of SNN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SNN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.