What Are Unilever plc’s Dividend Prospects Like Beyond 2014?

Royston Wild looks at the long-term payout potential of Unilever plc (LON: ULVR).

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Today I am looking at household goods giant Unilever‘s (LSE: ULVR) (NYSE: UL.US) dividend outlook past 2014.

An exceptional dividend selection

I am a firm believer that Unilever’s stunning growth prospects should allow its inflation-busting dividend policy to keep rolling well into the future, a point backed up by this week’s financial results for 2013.

The company’s expansive operations in emerging markets — Unilever sources approximately 57% of total revenues from these geographies — forms the lynchpin of my bullish perspective on its earnings potential. And this week’s update showed that sales here rose by a weighty 8.7% in 2013, with growth of 8.4% in the fourth quarter representing a bounceback from earlier weakness. Turnover growth dropped to 5.7% in quarter three from 8.8% in the prior three-month period.

City analysts expect Unilever to punch a modest 1% decline in earnings for the current year before rebounding a solid 10% in 2015. Indeed, sales growth in developing nations looks set to drive earnings solidly higher for the foreseeable future.

Brokers expect this bubbly earnings outlook to result in a 2.2% increase in the 2014 full-year payout to 111.9 euro cents, with a hefty 7.5% rise pencilled in for next year to 120.3 cents as earnings once again take off. These projected payments result in yields of 3.8% and 4.1% respectively, comfortably exceeding the 3.1% FTSE 100 average.

A concern to investors — particularly for cyclical plays such as Unilever — concerning future payments is meagre dividend coverage around 1.4 times prospective earnings for this year and next, well short of the widely-regarded security benchmark of 2 times.

Still, the household product play has regularly sported a reading short of this figure for some years now, and has still managed to lift the payout even in times of falling earnings. Indeed, Unilever’s dividend boasts an eye-popping compound annual growth rate of 27.8% for the past five years.

On top of this, Unilever’s position as a fantastic cash generator should also assuage concerns over its ability to maintain dividend growth even in the event of fresh sales weakness. The company punched meaty free cash flow of €4.99bn last year, albeit down from €5.16bn in 2012 mainly owing to changes in working capital.

So in my opinion, Unilever’s premier position in increasingly-affluent developing markets — underpinned by market-leading brands including Dove, Cif and Domestos — looks set to drive earnings, and thus dividend, expansion steadily higher.

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

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