Investor demand for British American Tobacco (LSE:BATS) and Legal & General Group (LSE:LGEN) shares have leapt in recent days. This is thanks in part to the eye-grabbing dividend forecasts that both FTSE 100 stocks offer for 2024.
The blue-chip cigarette manufacturer carries a mighty 10.9% dividend yield for next year. Its fellow Footsie share meanwhile, yields a lower-but-still-impressive 8.7%.
Both readings beat the Footsie’s forward average of 3.9% by a huge margin. But which has the better dividend prospects for the new year? And which one (if any) should I buy for my UK shares portfolio?
Poor dividend coverage
Of course, dividends can never be guaranteed and unexpected trading problems can cause havoc for a company’s payout policy.
In the case of BAT shares, weak dividend cover suggests any unexpected profits trouble could throw predicted payouts off course. Forecasts of an increased full-year payout of 249.4p per share is covered just 1.5 times by anticipated earnings.
This is well below the widely regarded security benchmark of 2 times and above. And in this respect Legal & General fares even worse — an improved 21.36p per share dividend forecast is covered just 1.2 times.
Strong balance sheet
However, Legal & General’s strong balance sheet means it looks in a great position to meet next year’s forecast reward.
The insurer’s Solvency II capital ratio improved to an impressive 230% as of June. Capital generation came in at £5.9bn during the first half, a figure that comfortably exceeded dividends of £3.6bn.
Things can change, of course. But encouragingly, back in August, the company said its capital generation and dividend programme for 2019-2024 remains on track. These are set to range £8bn-£9bn and £5.6bn-£5.9bn respectively by next year.
Weak balance sheet
British American Tobacco’s large debts mean it doesn’t look anywhere near as financially robust. Net debt stood at a hulking $37.8bn as of June.
The company has also said it expects adjusted net debt to adjusted EBITDA to sit at 2.7 times at the end of 2023. This is towards the higher end of its target range of 2 to 3 times.
BATS’ decided to stop share buybacks earlier this year to get to grips with its large financial liabilities. And I fear this could eventually impact the firm’s dividends.
The verdict
My concerns have increased further following the firm’s disappointing trading update this month. As well as writing down the value of its US brands by $25bn, it said revenues growth for 2023 would come in at the lower end of its 3-5% target.
Soaring demand in its non-combustible products (like the glo tobacco-heated product) provides a chink of light for British American Tobacco. But the company could still struggle next year given the tough economic outlook and growing popularity of illegal vapes.
Life insurance businesses also faces difficulties in 2024 if the global economy splutters. Yet despite this, the strength of Legal & General’s balance sheet means it appears in great shape to pay the gigantic dividends analysts are expecting. It certainly looks stronger than BATS on this front.
I already own shares in the financial services giant and I’m looking to add more to my portfolio soon to boost my passive income.
