Why I’d sell this dividend disaster to buy this FTSE 100 giant

There are many dividend shares on increasingly-fragile ground. Royston Wild looks at one that investors should probably avoid, and a FTSE 100 (INDEXFTSE: UKX) pick set to thrive.

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With pressured shopper budgets smacking demand for big-ticket items such as cars, I reckon share selectors should give Lookers (LSE: LOOK) a wide berth.

The car retailer alluded to worsening conditions on Thursday: “The UK new car market has decreased since April and by the end of September, total UK registrations had reduced by 3.9% compared to the prior year, with a reduction in quarter three of 9%.”

Lookers also mentioned Society of Motor Manufacturer (SMMT) forecasts which prophesise a 4.7% decline in new vehicle sales in 2017, to 2.57m units.

In response to these tough conditions the Manchester firm said: “Our key manufacturer partners… are taking pragmatic and supportive actions such as reducing targets, increasing tactical incentives and helping us to reduce operating costs which will offset the effect of lower new car volumes going forward.”

Kick it to the kerb

Lookers hasn’t seen sales of new cars fall off a cliff yet. Far from it. The business said turnover from new vehicles — a market from which it sources 35% of profits — had risen 10% in the first nine months of 2017, matching the growth rate enjoyed between January-June.

However, the SMMT advised recently that new car sales tanked 12.2% year-on-year in October, speeding up from the 9.3% decline in September, which suggests revenues at Lookers will come under pressure sooner rather than later.

The City is currently expecting earnings to fall 7% in 2017 but to rebound 3% next year.  But I reckon the possibility of a bottom-line bounce-back any time soon is looking pretty remote, and as a consequence investors should pay little attention to its ultra-low forward P/E ratio of 6.8 times and steer well clear.

Brand beauty

The strength of its broad brand portfolio should set Unilever (LSE: ULVR), unlike Lookers, on course for sustained earnings and dividend growth in my opinion.

Whilst the FTSE 100 giant’s goods may be more expensive than the imitations offered by Britain’s supermarkets, they are not so costly as to suffer from plummeting demand in times of macroeconomic strife.

Rather, the superior quality of goods like Persil detergent and Magnum ice cream makes them firm favourites with shoppers regardless of broader economic pressure on wallets. And this makes Unilever a dependable earnings generator whatever the weather, with ongoing brand and product development also helping it to keep growing volumes ahead of the broader market.

International star

And on top of this, the Anglo-Dutch business has a global presence for extra reassurance that it can continue to grow profits in the event of wider macroeconomic turbulence in one or two regions. In particular, I am convinced the Footsie star’s strong foothold in emerging markets should deliver brilliant sales expansion in the years ahead (underlying sales in these developing regions bolted 6.3% higher during July-September).

So the City is expecting earnings at Unilever to swell 20% and 10% in 2017 and 2018 respectively, projections that make the business excellent value for money. A forward P/E ratio of 21.7 times is clearly pretty high on paper, although a PEG reading of 1.1 suggests the firm is actually excellently priced relative to its growth prospects.

What’s more, Unilever’s defensive qualities are expected to keep dividends barrelling higher — these are predicted to grow to 141.8 cents this year and to 154.8 cents in 2018.

Subsequent meaty yields of 3% and 3.2% for this year and next seal Unilever’s position as a scintillating share pick, in my opinion.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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