MENU

Are Dividends Built To Last At Unilever plc And BT Group plc?

Public Domain.

Some dividends have staying power. Companies delivering enduring dividends tend to back such often-rising payouts with robust business and financial achievement.

Meanwhile, it seems best to avoid fragile dividends that arise because of weaker operational and financial characteristics. However, fragile dividends often tempt me because of high dividend yields.

How to tell the difference

Under the spotlight today, two FTSE 100 firms: Unilever (LSE: ULVR) the consumer goods business and BT Group (LSE: BT.A) the telecoms provider.

These firms operate in different sectors, but they both have a reasonable dividend yield. At the recent share price of 2,847p, Unilever’s forward yield for 2016 is 3.2%. At 460p, BT’s is 3.3% for the year to march 2017.

Here are some tests to gauge business and financial quality. Each scores performance out of a maximum five.

  1. Dividend record

Unilever’s dividend has been slipping, but BT’s dividend growth is impressive.

Ordinary dividends

2011

2012

2013

2014

2015

Unilever  (cents)

77.61

78.89

91.05

90.2

88(e)

BT Group (pence)

8.3

9.5

10.9

12.4

13.9(e)

Over four years, Unilever’s dividend advanced around 13%. BT’s moved forward by 67%.

For their dividend records, I’m scoring Unilever 3/5 and BT 5/5.

  1. Dividend cover

Unilever expects its 2016 adjusted earnings to cover its dividend around 1.5 times. BT expects cover from earnings just over two times. I like to see earnings covering the dividend at least twice and ideally more.

However, cash pays dividends, so it’s worth digging into how well, or poorly, both companies cover their dividend payouts with free cash flow too.  

On dividend cover from earnings, Unilever scores 3/5 and BT 4/5.

  1. Cash flow

Dividend cover from earnings means little if cash flow doesn’t support profits.

Here are the firms’ recent records on cash flow compared to profits:

Unilever

2010

2011

2012

2013

2014

Operating profit (€m)

6339

6433

6977

7517

7980

Net cash from operations (€m)

5490

5452

6836

6294

5543

BT Group

 

 

 

 

 

Operating profit (£m)

2578

2919

2948

3145

3480

Net cash from operations (£m)

4566

3558

5295

4796

4796

Unilever’s consumer goods business, with its repeat-purchase credentials, delivers steady cash flow that generally supports profits. BT stands out however with its powerful cash flow ahead of profits.

I’m scoring Unilever 3/5 for its cash flow record and BT 5/5.

  1. Debt

Interest payments on borrowed money compete with dividend payments for incoming cash flow. That’s why big debts are undesirable in dividend-led investments.

Unilever’s gross debt runs at around twice the level of its operating profit and BT Group carries a debt load equal to just under four times its operating profit.

I’m awarding Unilever 4/5 and BT 2/5 for their approach to borrowings.

  1. Degree of cyclicality

Unilever is arguably less cyclical than BT. In economic collapse, consumers are more likely to cut back on telecom services than they are to stop eating or using cleaning products.

Unilever scores 4/5 and BT 3/5.

Putting it all together

Here are the final scores for these firms:

 

Unilever

BT Group

Dividend record

3

5

Dividend cover

3

4

Cash flow

3

5

Debt

4

2

Degree of cyclicality

4

3

Total score out of 25

17

19

BT Group wins this face-off, but both firms score quite well.

However, only one of these two firms made inclusion in a top Motley Fool wealth report covering five attractive dividend-generating companies. These five firms make good candidates for further research and remain strong and well-placed in their industries.

The Motley Fool analysts identified these London-listed market leaders as enduring long-term investments. You can download the report now, free, for a short while longerClick here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.