The London Stock Exchange Group (LSE:LSEG) share price has risen an impressive 16% since the start of 2023. This means, unfortunately, the company’s current dividend forecasts result in pretty low yields.
For 2023, the FTSE 100 firm carries a 1.3% yield, below the index’s forward-looking average of 3.7%.
But this wouldn’t deter me from investing in the company for passive income. In fact, the rate at which it has been lifting dividends in recent years makes it highly attractive to me as a long-term investor.
Here’s why I think London Stock Exchange shares could be a brilliant buy right now.
Dividend growth
During the past 20 years, the company has lifted shareholder payouts at a compound annual growth rate of 17.4%. This included another double-digit increase last year, to 107p per share.
City analysts expect the full-year reward to rise to 115.5p per share in 2023. A further lift, to 128.3p is predicted for next year too. As a result the dividend yield improves to 1.5%.
As I mention, the yield on London Stock Exchange shares lag the market average by a distance. But unlike many FTSE 100 shares that are struggling in the tough economic environment, I think the financial exchange and data company is in great shape to meet current dividend forecasts.
Predicted dividends for 2023 and 2024 are covered 2.9 times over respectively by anticipated earnings. Any reading above 2 times provides a wide margin of safety for investors.
On top of this, the company has a strong balance sheet it can use to pay those expected dividends if profits disappoint. Its day-to-day net debt to adjusted EBITDA target came in at a reasonable 1.8 times for the first half of 2023.
The company’s £750m share buyback programme launched last year underlines its financial strength and commitment to returning cash to shareholders
A stock to buy?
I do have some reservations about buying LSE shares. A lack of new initial public offerings (IPOs) in the UK is one major concern of mine. EY Club says there were just 18 public offerings in the first half of 2023, down from a peak of 47 in the same 2021 period.
A tough macroecononic and geopolitical landscape is limiting IPO action and, more alarmingly from a long term perspective, US listings are becoming more attractive to companies because of higher valuations and trading volumes.
But on balance I still think the FTSE 100 firm is a top share to buy today. And its not just because IPO action could spring back when business confidence eventually improves.
The acquisition of Refinitiv in 2021 makes London Stock Exchange a huge player in the data and analytics space. It’s a fast-growing part of the business (revenues here grew 7.6% in the first half). And the FTSE company could turbocharge profits here through further acquisitions.
Its recent decision to lift its net debt to adjusted EBITDA target (to 1.5-2.5 times) suggests more M&A action could be coming soon.
City analysts expect earnings growth to speed up from 6% in 2023 to double-digit percentages in 2024 and 2025. This is a FTSE stock that I think has massive investment potential.
