What can you say about Unilever (LSE: ULVR) (NYSE: UL.US)?
With its vast range of food brands, and cleaning and personal care products, coupled with a wide global reach, Unilever is one of those stocks that is considered safe — through thick and thin, people just keep on eating and scrubbing.
The Unilever share price wobbled a bit during the crash, but over the past 10 years it’s been pretty steadily heading upwards — it’s gained 125% to today’s 2,654p while the FTSE has put on just 50%.
The cash
But what about those dividends?
They’ve been steadily growing, too, with 2013’s payment of 109.5 eurocents per share representing a 13% rise on the previous year — and annual rises have been beating inflation for quite some time.
There are modest but still inflation-busting rises of 4% and 7% forecast for the next couple of years too, but the question is are they affordable?
Dividend cover is relatively low compared to some sectors, with last year’s cash handout covered around 1.5 times by earnings per share (EPS). But Unilever’s market is a relatively predictable one — there are few surprises year-on-year and sales and profits are steady.
Overall turnover did slip last year, by 3% to €49.8, but that included foreign exchange effects and net acquisitions and disposals — the company reported underlying sales growth of 4.3%, of which 2.5% was in volume growth with 1.8% contributed by price rises.
Steady cash flow
But for a company to throw off enough cash to keep its dividends going, we’re looking for strong margins and healthy cash flow. And Unilever has both of those — its 2013 core operating margin firmed up a little to 14.1%, with free cash flow reaching €3.9bn.
As the company itself said, that “represents cash flows that could be used for distribution of dividends, repayment of debt or to fund our strategic initiatives, including acquisitions, if any“.
The only downside I see is yield. With Unilever shares trading on a forward P/E of 20, we should be seeing a yield of only around 3.5% this year — and there are other reliable shares out there paying significantly more than that.
Desirable dividends
But it does at least beat the FTSE 100’s average dividend yield of around 3%, and we do have that safety and reliability on Unilever’s side — people are clearly prepared to pay more for such peace of mind.