Unilever recently raised its quarterly dividend by 3pc. While this may appear to be somewhat impressive at first glance – as it is above the current inflation rate of 2.2pc – the firm’s quarterly dividend is still only 7pc higher than it was in 2019. This means that investors in the company have experienced a significant decline in their purchasing power, since total inflation over the past five years amounts to roughly 24pc.
Due in part to its pedestrian pace of dividend growth over recent years, the company currently yields a rather modest 2.9pc. This is 70 basis points lower than the FTSE 100 index’s yield. When combined with a poor track record of dividend growth, this means that many income investors will understandably look past the global consumer goods company when deciding which stocks to buy.
Questor takes a slightly different view. Certainly, Unilever’s dividend growth has been thoroughly disappointing over recent years – especially on a real-terms basis. But the company has experienced a hugely challenging period due to a cost-of-living crisis prompted by rampant inflation.
Severe pressure on disposable incomes has caused many consumers to reduce their consumption of the firm’s products, or even trade down to cheaper substitutes. But with the era of above-target inflation across developed economies now coming to an end, the firm’s financial outlook is set to significantly improve.
Indeed, lower inflation should prompt interest rate cuts in the US and elsewhere that have a positive impact on the world economy’s performance. This should further enhance Unilever’s financial prospects due to its significant exposure to emerging markets. In fact, the IMF currently expects emerging economies to expand by 4.3pc in both 2024 and 2025. This is more than double the rate of growth forecast for advanced economies over the same period.
In the meantime, the company’s recently released first-half results showed that its overall performance is encouraging. Year-on-year sales growth amounted to 4.1pc, while its operating profit margin rose by 250 basis points to 19.6pc. Its major brands, which account for around 75pc of revenue, generated sales growth of 5.7pc versus the same period of the prior year.
A shift in strategy should act as a further catalyst on the firm’s bottom line. Notably, Unilever is on track to complete the separation of its ice cream business – which produced sales growth of just 0.6pc in the first half of the year – by the end of 2025. The company is also implementing a major productivity programme that is set to support profit margins over the coming years.
A stronger operating environment, coupled with a revised strategy, should ultimately have a positive impact on the company’s income prospects. Shareholder payouts are currently covered over 1.8 times by profits, which suggests that a substantial part of any rise in earnings is likely to be passed on to investors in the form of higher dividends.
In this column’s view, a brisk rate of growth in shareholder payouts would more than adequately compensate investors for a relatively modest yield.
The company’s ample dividend cover also means that shareholder payouts are likely to be relatively resilient amid an uncertain near-term outlook for the world economy. While impending interest rate cuts are set to boost the prospects for global growth over the long run, time lags could mean that a period of economic uncertainty plays out in the short term.
Given the firm’s size and scale, as well as its financial strength, it is well placed to ride out economic challenges. Indeed, Unilever’s net finance costs were covered over 20 times by operating profits in its latest financial year.
Trading on a price-to-earnings ratio of 22.5, the company’s shares are by no means cheap. But with the firm’s earnings having risen by over 16pc in the first half of the year, it nevertheless offers good value for money.
The firm’s future performance is set to be significantly stronger than its 2pc share price decline over the past five years, as a refreshed strategy is implemented and operating conditions for global consumer goods companies gradually improve. Given that this should lead to a much faster pace of dividend growth than in recent years, we will now use excess cash in our income portfolio to fund the stock’s addition.
Questor says: buy
Ticker: ULVR
Share price: 4,912p
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