Today I am looking at why I believe Unilever (LSE: ULVR) (NYSE: UL.US) is a precarious dividend pick.
City expects plump payout expansion
Unilever has maintained an ultra-progressive dividend policy during the past five years despite continued earnings volatility, making it a favourite for those seeking reliable annual payout expansion.
With this in mind, City analysts expect the business to keep payouts rolling higher this year and next, and predict the firm will lift the full-year dividend to 114.06 euro cents per share in 2014, up 4% from last year. An extra 6% advance, to 120.84 cents, is chalked in for the following 12-month period.
These projections create a yield of 3.7% for this year, surpassing a forward average of 3.5% for the FTSE 100 as well as a corresponding reading of 2.4% for the complete food producers and processors sector. And this marches to 4% for 2015.
… but sales outlook undermines dividend prospects
However, I believe that slowing sales growth across the globe threatens Unilever’s dividend prospects this year and possibly beyond.
The business disappointed the market this month when it announced underlying sales crept just 2.1% higher during July-September to €12.2bn, slowing from growth of 3.7% during the previous three months and marking the lowest rate of growth since 2009.
Although Unilever saw trade in North America begin to pick up, in Europe a backdrop of severe price deflation weighed heavily on sales. And in emerging markets — responsible for 57% of group revenues — weak market conditions and significant destocking in China weighed on performance. And worryingly the household goods giant noted that “we expect markets to remain tough for at least the remainder of the year.”
Against this backdrop City brokers expect the business to record miserly earnings growth of just 1% in 2014, but which revs to a more respectable 8% for 2015. Still, for income investors these figures cast a shadow over dividend forecasts for this year and next — predicted payouts are covered just 1.4 times and 1.5 times by earnings in 2014 and 2015 correspondingly, some way below the security benchmark of 2 times.
And Unilever’s escalating debt pile may also prohibit its ability to keep dividends ticking higher while the top line continues to deteriorate. Net debt registered at a meaty €9.3bn as of June, up from €8.5bn at the turn of the year.
Unilever has divested a number of business in recent times to strengthen the balance sheet, but the firm is still having to splash the cash to keep rolling out its brands in new markets and introduce variations across its blue-ribbon labels to resuscitate growth.
Given this difficult trading environment and quest to return to breakneck earnings growth through heavy investment, I believe that dividends at Unilever could come under threat in the near future.
