Are these the top stocks to watch in 2025?

FTSE 100 performance in 2024

An interesting dichotomy in the UK’s economy has started to open up in 2024. The economy began to contract towards the end of the year — and the London Stock Exchange suffered the worst year for departures since 2009 — losing 88 companies to delisting or transferring out of the country.

On the other hand, the FTSE 100 just saw its best year since 2021, with a total return including price and dividends of 11.4%. Of course, while some of this outperformance is due to takeover activity, which perhaps highlights the performance gap of London-listed companies, 48 out of the 100 businesses on the index delivered a double-digit return.

Interestingly, in a world where the NASDAQ tech titans are taking up all the headlines, some of the highest-returning FTSE 100 companies have beaten many of their largest US peers. And with inflation perhaps starting to flicker, ongoing geopolitical tensions, and a new uncertain Trump Presidency, the relative safety of the UK’s dividend stocks may be starting to look more attractive.

Of course, the S&P 500 has delivered a larger total return of 29.3%. But as ever, much of this return has been delivered by a small handful of companies heavily weighted at the top, driven by artificial intelligence demand.

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Top stocks to watch in 2025

The following five stocks were the five best-performing FTSE 100 shares of 2024.

1. NatWest
2. Rolls-Royce
3. DS Smith
4. IAG
5. Barclays

NatWest (LON: NWG)

NatWest shares have risen by 85% in 2024, but the company also sports a 4.3% dividend yield. The FTSE 100 bank continues to beat expectations, with Q3 results seeing an attributable profit of £1.17 billion and a return on tangible equity of 18.3%.

Despite elevated interest rates, net loans increased by £8.4 billion — though some of this was due to acquiring Metro Bank’s mortgage portfolio. Overall, total income increased by 5.1% year-over-year to £3.77 billion.

CEO Paul Thwaite enthuses that ‘the strength of NatWest Group’s performance is underpinned by the support we provide to our 19 million customers in every nation and region of the UK…As the UK’s biggest bank for business, and one that serves millions of households, NatWest Group plays a key role in driving economic growth across the UK. Throughout the third quarter of 2024, we have grown our lending, helping customers to buy or remortgage their homes or to start and grow their businesses.’

The bank also noted that through a combination of low defaults and increased optimism among consumers and businesses, it was expecting another decent performance in 2025. With inflation perhaps stickier than expected, the bank may also benefit from rates staying higher for longer.

Rolls-Royce (LON: RR)

Rolls-Royce enjoyed another superlative year and may continue to rise in 2025. The aerospace and defence company returned 92% in 2024 after CEO Tufan Erginbilgic worked his magic on the ‘burning platform.’

H1 2024 revenue increased by more than £1 billion to £8.86 billion, while profit before tax almost doubled to £1.035 billion — and free cash flow nearly trebled to £1.158 billion. Meanwhile, return on capital rose from 9% to 13.8%, as net debt was reduced to just £800 million.

Erginbilgic enthused ‘Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity. We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing….These results and our increased financial resilience give us the confidence to raise our 2024 guidance and reinstate shareholder distributions in respect of the full year 2024 results.’

Of course, the company is also enjoying some external tailwinds, including growing demand for long-haul flights which increases the number of engines and amount of servicing Rolls-Royce makes and does. For perspective, flight hours are now above pre-pandemic levels.

But there’s also been good progress in its submarine segment, and investors looking for further growth may point to the small modular nuclear reactors, which may soon be deployed in the UK after being granted approval in Poland.

DS Smith (LON: SMDS)

DS Smith has returned 79% year-to-date, excluding a healthy dividend. Inarguably, the lion’s share of this rise has been due to its planned merger with International Paper — which valued DS Smith at £5.8 billion back in April. Once the merger is completed, DS Smith shareholders will own circa a third of the combined business. The takeover offer came in at a 48% premium and is expected to complete in Q1 2025.

DS Smith remains a leading provider of sustainable packaging solutions, paper products and recycling services worldwide, but has had to contend with lower industry prices over the last couple of years. But in half-year results, it still generated an adjusted operating profit of £221 million, in line with expectations and despite the ongoing challenging market conditions — and like for like box volume grew by 2%.

CEO Miles Roberts noted ‘We have delivered a solid performance, with profitability in line with our expectations, despite a continued challenging market environment…Looking forward, whilst recognising the recent paper price weakness, we continue to expect modest growth in packaging volumes and increasing sequential prices to recover higher input costs.’

It’s worth noting that merger and acquisition activity among undervalued UK stocks was somewhat of a theme in 2024 and may continue in 2025 unless the market starts to better recognise their underlying value.

IAG

International Consolidated Airlines — owner of British Airways, Iberia, Vueling and Aer Lingus among others — is up 90% year-to-date, and may continue to rise as travel appears to be being prioritised where other areas are being cut in personal budgets.

In Q3 2024 results, IAG saw total revenue rise by 7.9% year-over-year to €9.3 billion, while operating profit increased by 15.4% to a little over €2 billion. With operating margins also improving, significant free cash flow and an ‘increasingly strong balance sheet,’ the airline is also conducting a €350 million share buyback even as it expands its fleet.

CEO Luis Gallego enthuses ‘We achieved a very strong financial performance in Q3 2024…due to the effectiveness of our strategy and Group-wide transformation. We are also delivering on our commitment to provide sustainable returns for shareholders. Demand remains strong across our airlines and we expect a good final quarter of 2024 financially.’

However, there are risks as ever. Consumer sentiment appears to remain weak, especially after the tax rises seen in the recent budget. easyJet, like all airlines, remains vulnerable to any major global shock, and there have been several of these in recent years.

Barclays

Barclays shares are up 75% year-to-date, not including its 3% dividend yield. Like NatWest, the FTSE 100 bank has benefitted from the higher rate environment and has also enjoyed lower impairments than it expected.

It’s worth noting that Barclays has a global presence as an international investment bank, and also generates substantial profit from its credit card business. Perhaps a segment to watch is the equity trading side, where increasingly tough competition is making it harder to compete.

In Q3 2024 results, CEO CS Venkatakrishnan noted that the bank continues ‘to be focused on disciplined execution of our three year plan and are encouraged with progress to date. Whilst there is more work to do, the Group is on track to achieve its target of greater than 12% RoTE in 2026. In Q324 Barclays delivered a RoTE of 12.3%, supporting our target of greater than 10% in 2024. Tangible net asset value (TNAV) per share increased to 351p, up 11p versus prior quarter and up 35p year-on-year.’

The bank also benefitted from the acquisition of Tesco Bank — and maintains a strong CET1 RATIO of 13.8%, at the higher end of the target range.

Top stocks summed up

• The FTSE 100 just saw its best year since 2021, with a total return including price and dividends of 11.4%
• Some of the highest-returning FTSE 100 companies have beaten many of their US peers.
• NatWest, Rolls-Royce, DS Smith, IAG and Barclays could be the five best stocks to watch next year. These were the five best-performing FTSE 100 shares of 2024
• With UK shares perhaps undervalued by international standards, there may be more merger and acquisition activity in 2025