Friday, February 27, 2015

Unilever (UL) Dividend Stock Analysis 2015

Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, Europe, and the Americas. This international dividend achiever has paid dividends since 1937, and has increased dividends for 19 years in a row.

The company's last dividend increase was in June 2014 when the Board of Directors approved a 5.90% increase in the quarterly distribution to 28.50 eurocents /share. The company's peer group includes Nestle (NSRGY) and Procter & Gamble (PG).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.30% to its US shareholders.

The company has managed to deliver a 9.20% average increase in annual EPS since 2004. Analysts expect Unilever to earn $2.15 per share in 2015. In comparison, the company is expected to earn $2.01/share in 2014. Over the next five years, analysts expect EPS to rise by 4.10%/annum. All this information is in US dollars however, while the company reports earnings in Euros. While earnings appear to be flat in dollars over the past 5 years, they actually increased in Euros.

The company is dually listed in the U.K. and the Netherlands. There are two classes of ADRs available for US investors, one for the U.K. listing - Unilever PLC (UL) and the other being Unilever N.V. (UN) in the Netherlands. For U.S. investors, the U.K. traded shares are much more desirable, because the U.K. does not withhold taxes on dividends. This makes the Unilever PLC (UL) shares best for retirement accounts. In a taxable accounts for investors already paying 15% on dividends, it might make slightly better sense to buy the Unilever N.V (UN) shares, since they are always selling at a slight discount.

A large share of Unilever's sales are derived from emerging markets, where revenue growth is expected to continue at a high single digit to a low double digit rate of increase. The company has also been able to pass on increases in prices of raw materials onto consumers, who purchase its branded products globally. The risk behind this strategy is if Unilever increases prices too rapidly, sales volumes might suffer as a result. Typically however, while the market for food and personal consumer products is highly competitive, demand is stable and relatively immune from economic stress. The company's strategic plans have revealed that it expects long-term sales growth of 3%- 5% per year.

The company generates a very high return on equity, which has declined however over the past decade. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 7.50% per year since 2004, which is slower than the growth in EPS. With international dividend achievers, it is important to look at the trend in distributions in their base currencies. Despite the fact that the annual dividend payment appears volatile in US dollars, the growth in distributions in Euros has shown a consistent upward trend in distributions.


Year
Dividend Per Share/ Euro
1991
               0.2100
1992
               0.2200
1993
               0.2233
1994
               0.2333
1995
               0.2333
1996
               0.2633
1997
               0.3367
1998
               0.3800
1999
               0.4233
2000
               0.4767
2001
               0.5200
2002
               0.5667
2003
               0.5800
2004
               0.6300
2005
               0.6600
2006
               0.7000
2007
               0.7200
2008
               0.7600
2009
               0.7800
2010
               0.8190
2011
               0.8830
2012
               0.9540
2013
               1.0500
2014
               1.1240

A 7.50% growth in distributions translates into the dividend payment doubling almost every nine and a half years on average. If we look at historical data, going as far back as 1996, one would notice that the company has actually managed to double distributions every nine years on average.

The dividend payout ratio has remained at or above 60% over the course of the past decade, with the exception of a brief decrease below in 2007 and 2008. Currently, this ratio is above 70%, which is not something I would like to see in a company I am considering purchasing. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


Currently Unilever is slightly overvalued at 20.90 times earnings, yields 3.10% and has a sustainable distribution. Since the stock is trading above a P/E of 20, I would only consider adding to my position there on weakness in the share price. The thing that I do not like however is the high payout ratio, and the slowing down of earnings growth. That being said, I believe Unilever is a good hold for long-term investors.

Full Disclosure: Long UL

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