Right now, they offer attractive dividends yields. But is one a better buy for my portfolio than the other? Let’s compare the two dividend champions.
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Dividend stocks: GSK vs Unilever
Before I analyse the dividend yields that these stocks offer, I think it’s worth looking at the long-term growth prospects of each company. Ultimately, a company’s long-term growth has a massive impact on its ability to sustain its dividend payments. Growth can also boost a company’s share price, which can lead to higher total returns (capital gains and dividends).
While these two companies haven’t delivered huge growth in recent years, I believe both have reasonable growth prospects in the long run. Glaxo – which plans to split into two companies in 2022 – should benefit from the ageing population and rising demand for healthcare products. Meanwhile, Unilever should benefit from rising wealth in emerging markets, where it generates over 50% of its revenues. Unilever is also making a push into higher-growth product segments such as plant-based food, vitamins, and pet care.
Both companies face risks, of course. GSK is facing some challenges in its pharmaceuticals division due to patent expirations and generic competition. Unilever is having to deal with changing consumer preferences. Overall, however, I’d probably give Unilever a slight edge in terms of growth prospects.
Zooming in on dividends, GSK recently declared a full-year payout of 80p per share – the same payout as the previous five years. At the current share price, that equates to a yield of 6.3%. It advised that it expects to pay 80p for FY21 too. Analysts expect earnings of 114p per share for FY21 so the dividend coverage ratio – a key measure of dividend safety – is 1.43. I generally like to see a ratio of 1.5 or higher.
It’s worth noting, however, that GSK said last week that a new distribution policy will be implemented in 2022 to support growth and investment. It also said that aggregate distributions are expected to be lower than at present. In other words, investors can expect a dividend cut. I think that’s the right move for the company because it will help boost growth. However, it’s not ideal for dividend investors.
Turning to Unilever, it has consistently raised its dividend in recent years and last week lifted its quarterly dividend by 4% to €0.4268. That equates to an annual payout of €1.71. At the current share price, that means a yield of about 3.8%. Analysts expect earnings of €2.55 this year, which gives a dividend coverage ratio of 1.5.
Finally, looking at valuations, GSK currently trades on a forward looking P/E ratio of 11.1 while ULVR is on a forward P/E 18.3. So GSK is the cheaper stock by this valuation metric.
While GSK currently offers a higher yield than Unilever and sports a lower valuation, I see Unilever as the superior dividend stock at present. It’s the stock I’d buy for my portfolio today.
There are risks to the investment case. If future growth disappoints, its share price could fall. And the dividend isn’t guaranteed. However, given the company’s track record and future growth prospects, I see it as a better dividend stock than GSK right now.