How Unilever Will Deliver Its Dividend

LONDON -- I'm looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.

Today, I'm putting Anglo-Dutch consumer goods giant Unilever  (LSE: ULVR  ) (NYSE: UL  ) under the microscope.

Dividend policy
Soon after Paul Polman took over as chief executive in January 2009, Unilever announced a new dividend policy to run from 2010 onward: "Unilever's policy is to seek to pay an attractive, sustainable and growing dividend to shareholders."

The company said it would move from paying an interim and final dividend each year to paying four quarterly dividends, announced with the quarterly results. It added that the change would "better align the payments with the cash flow generation of the business."

Dividend delivery
The table below shows the extent to which Unilever has grown its dividend since the move to quarterly payouts. It should be noted that the company's reporting currency is the euro. Thus, the euro dividend is the gauge for measuring performance against policy, while the sterling dividend is at the mercy -- for better or worse -- of prevailing exchange rates.

Metric 

2010

2011

2012

Dividend in euros

0.832

0.900

0.972

Dividend growth in euros

5%*

8.2%

8%

Dividend in pounds

0.712

0.761

0.789

Dividend growth in pounds

9.5%*

6.9%

3.7%

*Adjusted for change to quarterly dividends.

Unilever has delivered a growing dividend -- nicely ahead of inflation -- for euro and sterling investors alike, even though exchange rates have worked against the latter during the most recent two years.

What about the "sustainable" aspect of Unilever's dividend policy? Let's have a look at free cash flow (FCF). This is the amount of surplus cash generated by a company, available for dividends or other discretionary uses, and is a more difficult number for companies to "massage" than earnings. The table below shows FCF, gross dividends paid, and how many times the dividend is covered by FCF.

Metric 

2010

2011

2012

Total
2010-2012

FCF (billion euros)

3.37

3.08

4.33

10.78

Gross dividends FCF (billion euros)

2.32

2.49

2.70

7.51

Dividend cover

1.5 times

1.2 times

1.6 times

1.4 times

As you can see, Unilever's dividend has been comfortably covered by FCF. This means that there's also room for the company to up capital expenditure when required, as in 2011 when management invested in new capacity to support volume growth in emerging markets.

Summing up
Compared with some companies, Unilever's dividend policy is fairly imprecise. However, in practice, the group has delivered growth ahead of inflation, and with the dividend amply covered by FCF.

The starting income Unilever currently offers -- 3.1%, at a share price of 2,862 pence -- is a long way from being the highest in the market, but the dividend does look one of the more secure and sustainable. For these qualities, though, you'll have to pay a premium price: 20 times this year's forecast earnings.

If you already own shares in Unilever -- or are thinking of investing in the company -- you may wish to read this free Motley Fool report. You see, Unilever is one of a select handful of blue-chip companies that have been pinpointed by our top analysts as "5 Shares to Retire On."

The Fab Five, which include a utility group "with nearly guaranteed returns" and a health-care company with "prodigious cash generation," are some of the highest-quality businesses you'll find within the FTSE 100.

This free report can be yours right now with no further obligation -- simply click here.

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