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Unilever plc (ADR) (UL): How Does It Stack Up?

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LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

Unilever plc (ADR) (NYSE:UL)I am currently looking at the dividend prospects of Unilever plc (ADR) (NYSE:UL) and assessing whether the company is an appetizing pick for income investors.

How does Unilever’s dividend history stack up?

Metric 2009 2010 2011 2012
FY Dividend Per Share 41.26 71.24 77.61 78.89
DPS Growth (%) (32.1) 72.7 8.9 1.7
Dividend Cover 0.4 times 0.6 times 0.6 times 0.6 times

Source: Unilever company accounts.

Unilever plc (ADR) (NYSE:UL) has gradually rebuilt its progressive dividend policy from 2010 onward, after collapsing profits in 2009 resulting from wider macroeconomic travails prompted it to slash dividends.

This can be attributed to a large degree to the firm’s low dividend cover, which falls some way short of the widely regarded benchmark of two times forward earnings.

What are Unilever’s dividends expected to do?

Metric 2013 2014
FY Dividend Per Share 87.25 94.54
DPS Growth (%) 10.6 8.4
Dividend Cover 1.6 times 1.7 times
Dividend Yield 3.10% 3.40%

Source: Digital Look.

City forecasters expect the company to ramp up dividend growth in the medium term as revenues hot up, with earnings per share expected to rise 5% and 10% in 2013 and 2014, respectively, to 143 pence and 156 pence.

An expected improvement in dividend cover should also help to safeguard shareholder payments. Also, its operations in the traditionally “defensive” sector in fast-moving consumer goods (FCMG) leaves it better placed to guard against a difficult economic backdrop, making it better placed than many other stock selections.

Unilever plc (ADR) (NYSE:UL)’s April interims showed group turnover clock in at 12.2 billion euros in January-March, with underlying sales rising a healthy 4.9% in the period. The company’s heavy presence in developing markets — these regions now account for almost 60% of total revenues — is helping the firm to shrug off weakness in established markets, particularly Europe.

Indeed, the firm recorded organic sales expansion of 10.4% in the first quarter, the eighth successive quarter of double-digit growth, and continues to build there through rising volumes, boosted by a steady stream of product launches and excellent pricing power. Additionally, the firm is also ratcheting up M&A activity here, and last month announced plans to boost its holding in Hindustan Unilever of India, to 75% from 52.48% currently.

Unilever plc (ADR) (NYSE:UL) — which distributes dividends on a quarterly basis — highlighted its increasingly lucrative dividend policy April’s interims, when it announced it was hiking its January-March dividend by almost 16% on an annualized basis to around 22.9 pence.

How does Unilever’s dividend prospects rate against the competition?

Prospective Dividend Yield Prospective P/E Ratio
Foods Producers & Processors 2.20% 11.4
FTSE 100 3.20% 15.2

Source: Digital Look.

Unilever plc (ADR) (NYSE:UL) currently changes hands on a P/E rating of 19.6 for this year and 17.8 for 2014, representing a sizable premium to both its sector average as well as that of the FTSE 100. The company’s 3.1% prospective dividend yield for 2013 also easily supersedes that of its sector rivals.

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