With inflation wreaking havoc on profit margins, many investors are seeing their dividend income take a hit. But can Unilever (LSE:ULVR) shares be a safe-haven against the rising costs? Let’s take a closer look.
Over 20 years of dividends
As a reminder, Unilever is one of the UK’s leading consumer products companies. The business has 400 brands that can be found in almost any supermarket, including Hellman’s, Ben & Jerry’s, Dove, and Lipton, just to name a few.
This is actually what makes the company such a popular income stock among investors. Consumer products are hardly the highest growth area of the market and the 3.8% yield certainly isn’t earth-shattering. But the power of branding enables the group to charge a premium to customers and steadily raise prices in line with inflation.
This consistency is one of the primary reasons Unilever shares have delivered 20+ consecutive years of dividend growth. But can this trend continue?
Are Unilever shares poised for growth?
The company’s branding power is undoubtedly a powerful advantage. But it may not be as extensive as many believe. Looking at the 2022 guidance provided by management, it seems profit margins are expected to take a 1.4-2.4% hit this year.
With the cost of living expected to rise exponentially, it appears Unilever has decided to absorb some of the inflationary pressure to retain its customer base. After all, if consumers start looking to cut costs, premium products are usually first on the chopping block.
In my opinion, this move is necessary. However, thanks to a bit of restructuring, the business is expected to enjoy €600m (£500m) of annualised savings over the next two years. Meanwhile, if the current inflation rate is only transitory, margins are expected to be largely restored by 2023.
What’s more, Unilever just announced its plans to buy back €3bn (£2.5bn) of shares over the next two years as well. Generally, this is quite an encouraging sign as it demonstrates management’s faith in the firm’s financial and operational strength. That’s a key trait I like to see when picking dividend stocks for my portfolio.
Risks to consider
As encouraging as this guidance is, not all investors are happy with the strategy. Leading UK fund manager Terry Smith has been rather critical of the business for fixating on developing its public sustainability profile rather than focusing on improving fundamentals.
Having a robust public image can work wonders in attracting new customers. And even investors have become intrigued by this prospect with the rise of ESG investing. However, the evidence surrounding whether sustainable businesses drive superior financial performance is mixed. And, in some cases, it has actually harmed financial performance.
Needless to say, if Unilever ends up with the same fate, then its shares could suffer.
Should I buy Unilever shares?
While Smith may have a valid point, I’m cautiously optimistic about the future of Unilever shares and the dividend payout. Therefore, I am considering adding this business to my portfolio today, despite the risks.