Is Unilever plc A Super Income Stock?

Does Unilever plc (LON: ULVR) have the right credentials to be classed as a very attractive income play?

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Shares in Unilever (LSE: ULVR) (NYSE: UL.US) delivered a disappointing 2013, ending the year up 4% while the FTSE 100 posted gains of 14%. 2014 has been a similar story, with Unilever underperforming the FTSE 100. A key reason for this has been uncertainty surrounding the emerging market growth story and, with over half of Unilever’s revenue being derived from the developing world, it is perhaps understandable that its shares would be relatively weaker in 2014.

However, does the weak share price mean that Unilever is a more (or less) attractive income play? Can Unilever still be classed as a super income stock?

With a yield of 3.9%, Unilever can still be classed as a high-yielding share. Indeed, its yield is above the FTSE 100’s yield of 3.5% and is considerably better than the interest rate on a typical high street bank account as well as being above inflation.

unileverIn addition, Unilever has a strong track record when it comes to increasing its dividend. While many companies struggled during the credit crunch, Unilever’s significant exposure to emerging markets was a real fillip for the company and it delivered relatively strong performance as a result. This meant that the company had scope to increase dividends per share at an annualised rate of 10% over the last three years.

Furthermore, Unilever is also forecast to increase dividends per share in 2015, with the market expecting a growth rate of over 6%. Although less than the rate of growth seen in recent years, this is still comfortably ahead of inflation and compares favourably to the company’s FTSE 100 peers.

Of course, Unilever is being fairly generous with regard to dividends. It has a dividend payout ratio (the proportion of net profit paid out as a dividend) of around 70%. While this leaves some capital to reinvest in the business (which can be put to use in things such as the acquisition of more brands) it doesn’t leave a vast amount. In other words, a payout ratio of 70% is perhaps at the upper limit of what Unilever can reasonably offer to investors, so dividend per share increases could be linked more closely to future profit growth rather than growth in the payout ratio.

That said, Unilever looks well-placed to continue its strong performance and its exposure to emerging markets could help to deliver an above-average bottom-line growth rate over the medium to long term. With a yield of 3.9% and strong dividend per share growth prospects, Unilever remains a super income stock — especially for investors with a longer term outlook.

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.

Peter does not own shares in Unilever. The Motley Fool owns shares in Unilever.

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