Today I am looking at household goods giant Unilever‘s (LSE: ULVR) (NYSE: UL.US) dividend outlook past 2014.
An exceptional dividend selection
I am a firm believer that Unilever’s stunning growth prospects should allow its inflation-busting dividend policy to keep rolling well into the future, a point backed up by this week’s financial results for 2013.
The company’s expansive operations in emerging markets — Unilever sources approximately 57% of total revenues from these geographies — forms the lynchpin of my bullish perspective on its earnings potential. And this week’s update showed that sales here rose by a weighty 8.7% in 2013, with growth of 8.4% in the fourth quarter representing a bounceback from earlier weakness. Turnover growth dropped to 5.7% in quarter three from 8.8% in the prior three-month period.
City analysts expect Unilever to punch a modest 1% decline in earnings for the current year before rebounding a solid 10% in 2015. Indeed, sales growth in developing nations looks set to drive earnings solidly higher for the foreseeable future.
Brokers expect this bubbly earnings outlook to result in a 2.2% increase in the 2014 full-year payout to 111.9 euro cents, with a hefty 7.5% rise pencilled in for next year to 120.3 cents as earnings once again take off. These projected payments result in yields of 3.8% and 4.1% respectively, comfortably exceeding the 3.1% FTSE 100 average.
A concern to investors — particularly for cyclical plays such as Unilever — concerning future payments is meagre dividend coverage around 1.4 times prospective earnings for this year and next, well short of the widely-regarded security benchmark of 2 times.
Still, the household product play has regularly sported a reading short of this figure for some years now, and has still managed to lift the payout even in times of falling earnings. Indeed, Unilever’s dividend boasts an eye-popping compound annual growth rate of 27.8% for the past five years.
On top of this, Unilever’s position as a fantastic cash generator should also assuage concerns over its ability to maintain dividend growth even in the event of fresh sales weakness. The company punched meaty free cash flow of €4.99bn last year, albeit down from €5.16bn in 2012 mainly owing to changes in working capital.
So in my opinion, Unilever’s premier position in increasingly-affluent developing markets — underpinned by market-leading brands including Dove, Cif and Domestos — looks set to drive earnings, and thus dividend, expansion steadily higher.