In the dividend report card series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

For a full explanation of each category, click here for a tutorial.

Today's pupil is Unilever (NYSE: UL), which has a 3.8% dividend yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

10.3%

Diluted earnings per share

13.0%

Source: Capital IQ, a division of Standard & Poor's.

In a word: impressive. Unilever has done a fine job increasing its dividend at a comparable rate to earnings, which is an ideal pattern.

Past returns don't guarantee future results, however, so dividend history is only 10% of the final grade. That said, for this category, Unilever scores a 5 of 5.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

11.8 times

10%

5

EPS payout ratio

59.0%

10%

4

FCFE payout ratio

73.4%

30%

4

Source: Capital IQ, as of Jan. 23, 2011.

Unilever's balance sheet appears to be quite strong and the interest coverage ratio has improved over the past three years, up from 9.1 times in 2007. Over that period, Unilever has always had ample free cash flow and earnings cover for the dividend. On the whole, the sustainability of the current payout doesn't seem to be a cause for concern.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

59.0%

10%

3

FCFE payout ratio

73.4%

20%

3

Sustainable growth rate

13.7%

10%

5

In the past year, Unilever altered its dividend policy, increasing payment frequency from semi-annual to quarterly and changing the reported dividend currency to just the euro. Depending on how the euro/dollar exchange rate fluctuates, this could either have a positive or negative effect on your realized dividends in the U.S.

That aside, it appears Unilever has the ability to raise its dividend at a high-single-digit rate over the next few years. Investors should, however, keep their eye on acquisition trends -- a large acquisition by Unilever could reduce the dividend growth potential.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against direct competitors'. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Kraft Foods (NYSE: KFT)

3.7%

9.0%

PepsiCo (NYSE: PEP)

2.9%

10.0%

Procter & Gamble (NYSE: PG)

2.9%

9.8%

With its current yield at 3.8%, Unilever's dividend yield is in the upper range of its peer group, but that may be a fair trade-off given that its median long-term EPS growth estimate is 8% -- slightly below this peer group.

Pencils down!
With all the numbers in, here's how Unilever's dividend scored:

Weighting

Category

Final Grade

10%

History

5

 

Sustainability

 

10%

Interest Coverage

5

10%

EPS Payout Ratio

4

30%

FCFE Payout Ratio

4

 

Growth

 

10%

EPS Payout Ratio

3

20%

FCFE Payout Ratio

3

10%

Sustainable growth

5

100%

Total Score (Out of 5)

4.0

 

Final Grade

B

Unilever did quite well in its first Dividend Report Card showing. The dividend is well covered, and profit in its Asia/Africa group has been growing nicely -- in 2009 that geographical segment represented 37% of sales and 38% of operating profit.

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Todd Wenning is advisor of Motley Fool UK Dividend Edge. Unilever is a Motley Fool Global Gains selection. PepsiCo, Procter & Gamble, and Unilever are Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool has a disclosure policy.