Bus and train operator Go-Ahead Group (LSE: GOG) rose by 9% this morning after the firm said adjusted pre-tax profits rose 39% to £138.5m last year.

One of Go-Ahead’s core attractions is its strong free cash flow, which is used to fund a generous dividend. That description can also be applied to FTSE 100 consumer goods giant Unilever (LSE: ULVR).

However, while Unilever currently trades at an all-time high, Go-Ahead is down by 20% since the start of the year. Problems with its Southern Rail franchise have hit the group’s share price. Could Go-Ahead be a better dividend buy than Unilever?

Motoring ahead

If you’re a Southern Rail passenger, you would probably expect the strikes, cancellations and engineering works that have plagued your commutes to have reduced Go-Ahead’s rail profits.

You’d be wrong.

Adjusted rail operating profit rose by 37% to £57m last year. Operating profit from the group’s bus division rose by 7.9% to £100.4m. Despite warning investors that future profit margins from the Govia Thameslink franchise (which includes Southern Rail) would be lower than expected, it was a good year for Go-Ahead.

The group’s adjusted earnings per share rose by 21% to 220.5p, while the total dividend will rise by 6.5% to 95.85p. This gives the shares a P/E of 10 and a trailing yield of 4.5%.

This dividend continues to be backed by free cash flow, which rose by 4.8% to £68.2m, or 158p per share. Go-Ahead’s net debt remained broadly unchanged, at £239.3m.

Too good to be true?

Go-Ahead’s finances look fairly sound to me. The group’s cash generation remains strong and net debt doesn’t look excessive relative to the £494.3m value of the firm’s property and fleet assets.

However, there are a few potential risks that could cause problems in the future. Go-Ahead’s bus pension plan liabilities are large, at £765.8m. If a pension deficit develops in the future, extra payments could eat up the firm’s profits, threatening the dividend. Political risks are also a potential concern, as many of Go-Ahead’s activities are regulated or influenced by government policy.

Despite these concerns, I’d be happy to buy Go-Ahead shares following today’s results.

But is Unilever a smarter buy?

Unilever shares have risen by 22% so far this year, thanks to a combination of exchange rate factors and investor demand for safe, defensive stocks.

The group’s dividend has grown by an average of 7.8% per year since 2010 and remained consistently covered by free cash flow. Unilever shares have risen by 105% over the last six years.

However, Unilever’s after-tax profit has only risen by an average of 3% per year. That’s slower than both the firm’s dividend payout and its share price. This means that Unilever is a more expensive business than it was in 2010.

At the time of writing, Unilever shares are trading at 3,590p, giving the company a 2016 forecast P/E of 23. The forward dividend yield is just 2.7%. In my view the shares are quite fully priced. Unless earnings growth rises, Unilever shares may struggle to beat the market over the next couple of years.

While I intend to continue holding my Unilever shares, I don’t plan to buy any more until they become cheaper.

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Roland Head owns shares of Unilever. 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.