Is Unilever plc An Annuity Alternative?

The annuity market is expected to halve in size following the Budget — but could Unilever plc (LON:ULVR) shareholders benefit from this change?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Annuity giant Legal & General expects the UK annuity market to halve in size following the changes announced to pension rules in this year’s Budget.

That means that the £12bn annuity market could shrink to just £6bn — leaving an extra £6bn per year in the hands of investors, many of whom I believe are likely to invest their pensions funds in dividend stocks.

unileverIn this article, I’m going to look at whether Unilever (LSE: ULVR) (NYSE: UL.US) could be one of the main beneficiaries of this surge of income-seeking cash.

Dividend powerhouse

Over the last 20 years — since 1993 — Unilever’s annual dividend has grown at an average rate of 9.9% per year. That means that the total dividend paid per share in 2013 was more than six times that paid in 1993.

Equally impressive is the fact that Unilever’s dividend was covered 1.5 times by free cash flow in 2013.

It’s this combination of long-running growth and matching cash flow generation that makes me such a big fan of Unilever, which is a share I hold in my own income portfolio.

Can Unilever keep it up?

Of course, the question for investors, like me, who are planning for a future retirement, is whether Unilever will be able to maintain its steady dividend growth. After all, things change. Will we all be buying branded goods in 20 years? Will emerging markets continue to drive earnings growth, as they adopt similar brand loyalties to those we’ve grown up with in the west?

Who knows.

After all, as HSBC Holdings recently pointed out in a broker note about the UK supermarket sector, Kwik Save was a FTSE 100 company two decades ago, while some readers may remember a time when the Co-Op had a 25% share of the UK supermarket sector. Things change.

Embracing change

One concern for me is that Unilever could be a victim to the increasingly popularity — and quality — of own-branded products in western supermarkets. I know I buy far more of them than I did ten years ago.

However, Unilever is already taking steps to protect itself from this trend, buy selling off its more commoditised and low-margin food businesses (such as pasta sauce brand Ragú) and focusing on higher margin home and personal care brands, where brand differentiation appears stronger, and helps support Unilever’s healthy 15% operating margin.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland owns shares in HSBC Holdings and Unilever but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Unilever.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »