Unilever, the global consumer goods giant, has recently implemented a 3% increase in its quarterly dividend. While this figure surpasses the current inflation rate of 2.2%, it's essential to view this development in a broader context.
Over the past five years, Unilever's dividend has grown by only 7%, significantly lagging behind the cumulative inflation rate of 24% during the same period. This disparity has resulted in a substantial decrease in purchasing power for the company's investors.
Currently, Unilever offers a yield of 2.9%, which falls 70 basis points short of the FTSE 100 index's yield. This relatively modest return, coupled with sluggish dividend growth, may deter income-focused investors from considering the stock.
However, a closer examination reveals potential for a more optimistic outlook. Unilever has faced considerable challenges in recent years, primarily due to a cost-of-living crisis fueled by high inflation. This economic environment has led consumers to reduce their consumption of Unilever's products or opt for less expensive alternatives.
As inflation rates in developed economies begin to stabilize, Unilever's financial prospects are poised for improvement. Anticipated interest rate cuts in the United States and other markets are expected to have a positive impact on global economic performance. This shift could particularly benefit Unilever due to its significant presence in emerging markets, which the International Monetary Fund projects will grow by 4.3% in both 2024 and 2025.
Unilever's recent financial results demonstrate encouraging progress. The company reported a 4.1% year-on-year sales growth in the first half of the year, with its operating profit margin increasing by 250 basis points to 19.6%. Notably, the company's major brands, accounting for approximately 75% of revenue, achieved a 5.7% sales growth compared to the same period in the previous year.
Strategic changes are also expected to bolster Unilever's performance. The company is on track to complete the separation of its ice cream business, which saw minimal growth of 0.6% in the first half of the year, by the end of 2025. Additionally, Unilever is implementing a comprehensive productivity program aimed at supporting profit margins in the coming years.
These factors combined suggest a potentially brighter future for Unilever's dividend growth. With shareholder payouts currently covered 1.8 times by profits, a significant portion of any earnings increase is likely to be distributed to investors through higher dividends.
Unilever's robust dividend coverage also indicates that shareholder payouts should remain resilient even in the face of short-term economic uncertainties. The company's size, scale, and financial strength position it well to navigate potential economic challenges.
While Unilever's shares trade at a price-to-earnings ratio of 22.5, which may seem high, the company's recent 16% earnings growth in the first half of the year suggests it offers good value. As Unilever implements its refreshed strategy and operating conditions for global consumer goods companies improve, the company's performance is expected to surpass its 2% share price decline over the past five years.
"Given that this should lead to a much faster pace of dividend growth than in recent years, we will now use excess cash in our income portfolio to fund the stock's addition. Questor says: buy"
Unilever's commitment to sustainability and its diverse brand portfolio further strengthen its long-term prospects. The company owns over 400 brands and has pledged to achieve net-zero emissions from its products by 2039. Its largest brand, Dove, generates more than €5 billion in annual revenue, highlighting the strength of Unilever's product lineup.
In conclusion, while Unilever's recent dividend history may not have been impressive, the company's strategic shifts, coupled with improving global economic conditions, present a compelling case for potential investors.