With dividend cuts flying as fast as a heavyweight's uppercuts, investors need to be sure that their income producers are set to go the distance. In such an environment, many investors turn to consumer staples in the hope that such seemingly recession-resistant stocks can endure and later emerge as dividend champs.
Shares of global consumer staples giant Unilever
Eye level with the competition
Naturally, to make sure our dividend payers can keep on keepin' on, we want to compare not only yields but also measures of dividend sustainability and the company's financial strength. The following table shows some consumer staples bellwethers.
|
Company |
Dividend Yield |
Payout Ratio |
Current Ratio |
Total Debt to Equity |
|---|---|---|---|---|
|
Unilever |
4.6% |
42% |
0.8 |
1.1 |
|
Kraft Foods |
5.2% |
57% |
1.0 |
0.9 |
|
General Mills |
3.4% |
51% |
1.0 |
1.4 |
|
Procter & Gamble |
3.3% |
35% |
0.7 |
0.7 |
|
Colgate-Palmolive |
2.9% |
42% |
1.3 |
2.0 |
Data provided by Capital IQ and Yahoo! Finance.
Is Unilever playing it fast and loose?
Unilever's payout ratio is conservative and its yield is bested only by Kraft's; nonetheless, the company's current ratio implies that the balance sheet holds more risk than one might expect of a "safe" consumer staples company. But first appearances can be deceiving...
Since 2000, Unilever's current ratio has waffled in the range of 0.7 to 0.8, suggesting that this is a perfectly comfortable position for the company. Cash flow has remained consistently high in that period, and operating cash flow in 2008 was in line with 2007. Moreover, last year, the company's average interest rate on outstanding debt dropped to a very manageable 4.5%, even as total debt increased.
If you think that such metrics do not exactly make for a ringing endorsement of Unilever's business prospects, I agree. In fact, if you scan the company's presentations from the recent Consumer Analyst Group of New York annual conference, it's hard to miss the general level of concern about declines in Unilever's volumes, the fact that consumers are trading down to cheaper brands, and the lasting specter of 2008's towering commodity costs.
As I see it, the argument for investing in Unilever or similar companies is the opportunity to buy into unusually high dividend yields, even if share prices look to be flat to down for the foreseeable future. The fact is, Unilever's payout ratio has room to rise over the next year or so, and I don't envision the operating environment worsening to the point that the company has trouble rolling over debt at attractive rates.
But if you're still a tad nervous about this investment approach, I recently detailed how investors can diversify their exposure between competing consumer trends. When relying on dividends, the last thing you want is an unexpected uppercut.
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