Is Unilever plc An Annuity Alternative?

Annuity giant Legal & General expects the UK annuity market to halve in size following the changes announced to pension rules in this year’s Budget.

That means that the £12bn annuity market could shrink to just £6bn — leaving an extra £6bn per year in the hands of investors, many of whom I believe are likely to invest their pensions funds in dividend stocks.

unileverIn this article, I’m going to look at whether Unilever (LSE: ULVR) (NYSE: UL.US) could be one of the main beneficiaries of this surge of income-seeking cash.

Dividend powerhouse

Over the last 20 years — since 1993 — Unilever’s annual dividend has grown at an average rate of 9.9% per year. That means that the total dividend paid per share in 2013 was more than six times that paid in 1993.

Equally impressive is the fact that Unilever’s dividend was covered 1.5 times by free cash flow in 2013.

It’s this combination of long-running growth and matching cash flow generation that makes me such a big fan of Unilever, which is a share I hold in my own income portfolio.

Can Unilever keep it up?

Of course, the question for investors, like me, who are planning for a future retirement, is whether Unilever will be able to maintain its steady dividend growth. After all, things change. Will we all be buying branded goods in 20 years? Will emerging markets continue to drive earnings growth, as they adopt similar brand loyalties to those we’ve grown up with in the west?

Who knows.

After all, as HSBC Holdings recently pointed out in a broker note about the UK supermarket sector, Kwik Save was a FTSE 100 company two decades ago, while some readers may remember a time when the Co-Op had a 25% share of the UK supermarket sector. Things change.

Embracing change

One concern for me is that Unilever could be a victim to the increasingly popularity — and quality — of own-branded products in western supermarkets. I know I buy far more of them than I did ten years ago.

However, Unilever is already taking steps to protect itself from this trend, buy selling off its more commoditised and low-margin food businesses (such as pasta sauce brand Ragú) and focusing on higher margin home and personal care brands, where brand differentiation appears stronger, and helps support Unilever’s healthy 15% operating margin.

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Roland owns shares in HSBC Holdings and Unilever but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Unilever.