A Closer Look at Unilever's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Unilever  (LSE: ULVR  ) (NYSE: UL  ) and assessing whether the company is an appetizing pick for income investors.

How does Unilever's dividend history stack up?

Metric 

2009

2010

2011

2012

FY Dividend Per Share

41.26

71.24

77.61

78.89

DPS Growth (%)

(32.1)

72.7

8.9

1.7

Dividend Cover

0.4 times

0.6 times

0.6 times

0.6 times

Source: Unilever company accounts.

Unilever has gradually rebuilt its progressive dividend policy from 2010 onward, after collapsing profits in 2009 resulting from wider macroeconomic travails prompted it to slash dividends.

This can be attributed to a large degree to the firm's low dividend cover, which falls some way short of the widely regarded benchmark of two times forward earnings.

What are Unilever's dividends expected to do?

Metric 

2013

2014

FY Dividend Per Share

87.25

94.54

DPS Growth (%)

10.6

8.4

Dividend Cover

1.6 times

1.7 times

Dividend Yield

3.10%

3.40%

Source: Digital Look.

City forecasters expect the company to ramp up dividend growth in the medium term as revenues hot up, with earnings per share expected to rise 5% and 10% in 2013 and 2014, respectively, to 143 pence and 156 pence.

An expected improvement in dividend cover should also help to safeguard shareholder payments. Also, its operations in the traditionally "defensive" sector in fast-moving consumer goods (FCMG) leaves it better placed to guard against a difficult economic backdrop, making it better placed than many other stock selections.

Unilever's April interims showed group turnover clock in at 12.2 billion euros in January-March, with underlying sales rising a healthy 4.9% in the period. The company's heavy presence in developing markets -- these regions now account for almost 60% of total revenues -- is helping the firm to shrug off weakness in established markets, particularly Europe.

Indeed, the firm recorded organic sales expansion of 10.4% in the first quarter, the eighth successive quarter of double-digit growth, and continues to build there through rising volumes, boosted by a steady stream of product launches and excellent pricing power. Additionally, the firm is also ratcheting up M&A activity here, and last month announced plans to boost its holding in Hindustan Unilever of India, to 75% from 52.48% currently.

Unilever -- which distributes dividends on a quarterly basis -- highlighted its increasingly lucrative dividend policy April's interims, when it announced it was hiking its January-March dividend by almost 16% on an annualized basis to around 22.9 pence.

How does Unilever's dividend prospects rate against the competition?

 

Prospective Dividend Yield

Prospective P/E Ratio

Foods Producers & Processors

2.20%

11.4

FTSE 100

3.20%

15.2

Source: Digital Look.

Unilever currently changes hands on a P/E rating of 19.6 for this year and 17.8 for 2014, representing a sizable premium to both its sector average as well as that of the FTSE 100. The company's 3.1% prospective dividend yield for 2013 also easily supersedes that of its sector rivals.

However, I am convinced that the firm's higher rating is warranted, and the strength of its brands should continue to deliver solid earnings growth and consequently increasingly appetising dividend prospects. Unilever's stable of enviable megaproducts, comprising of 14 so-called "1 billion euro brands," continue to make heady progress across the globe, while product innovation and brand strengthening leaves it in a better position than in 2009 and should facilitate future growth.

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Related Tickers

11/24/2014 4:07 PM
UL $41.59 Up +0.12 +0.29%
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