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Here's What Investors Need to Know About Unilever's Dividend

By Jamal Carnette, CFA - Aug 30, 2016 at 5:11PM

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There's lots of confusion about Unilever's above-average dividend payout and currency effects. Here's what you need to know.

Unilever's purchase of Dollar Shave Club (razor not pictured) was an aggressive play in the personal-care market. Image source: Getty Images

Unilever (UL 2.18%) (UN) may be the biggest company you don't know about. It's a fast-moving consumer goods, or FMCG, company, and it's likely you routinely purchase Unilever goods on a weekly basis. The company has 13 "billion-euro brands" with Dove, Lipton, and Hellmann's filling grocery carts every week. Additionally, Unilever has been aggressive in the personal-care space by buying Dollar Shave Club earlier this year for $1 billion, and owns the No. 1 men's fragrance brand, Axe.

For income investors, there's further confusion about the company. Here's how a company that has increased its dividend payout 7.4% per year over the last six years has been labeled an inconsistent dividend payer.

Unilever's history is important for dividend investors to understand

Unilever has an odd history, but it's important for income investors to understand it. The company was created through a business merger between Dutch company Naamloze Vennootschap Margarine Unie and U.K. soap manufacturer Lever Brothers in 1930. Astute readers may have noticed Unilever is simply a portmanteau of both names.

To avoid what Unilever calls "punitive taxation levels," the merger resulting in the formation of two new companies, which pooled their interests and agreed to equal treatment of dividends and profit. There are still two companies: the Netherlands-based Unilever NV and the British Unilever PLC.

This is important, because you'll notice there are two Unilever U.S.-listed shares. The UL (think Unilever London) shares are the American depositary receipts, or ADRs, of the British company, and UN (Unilever Netherlands) shares are depositary shares of the Dutch company. Considering the pooled-interests method guarantees equal treatment of profit and dividends, the ADRs typically trade very close to each other.

Unilever's dividend is subject to currency conversion

At first glance, it would appear Unilever has an unreliable dividend payout. The chart below shows the company's quarterly U.S. dividend is lower now than it was in 2014.

Source: Unilever.

Notice the dividend payouts are denominated in U.S. dollars. While most U.S. residents are accustomed to a dollar-denominated dividend, the presentation currency of Unilever is actually in euro. The reason the U.S. payout has been more volatile than that of traditional companies is due to exchange-rate effects. Here's an average of the exchange rates between these two currencies over the last seven years.

YearEuro/U.S. Dollar
2010 1.327386
2011 1.392705
2012 1.285697
2013 1.328464
2014 1.329165
2015 1.109729
2016 1.115366

Data source: USForex.com.

Currencies can be confusing to many investors, but an easy way to think of the table above is the U.S.-dollar figure it would take to equal 1 euro during the time period. As you can see, since it now requires fewer dollars (approximately $1.12 in 2016 vs. $1.33 in 2010), the dollar has strengthened. While this is good news for American tourists who are about to take a trip to Europe, unfortunately for Unilever's U.S. investors, your cash flows (an asset) are denominated in euros, and any further strengthening of the dollar will continue to negatively impact your dividend payout.

However, Unilever is actively returning cash to investors in a major way. On a constant-currency basis (that is, in euro), Unilever has increased its dividend from 0.832 to 1.28 (projected) during this time frame, an annualized increase of 7.4%. The variability in Unilever's dividends is due to currency effects. In the event the euro reverses and strengthens against the dollar, however, investors will get stealthy dividend increases.

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