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The Risks Of Investing In Unilever plc

Today I am highlighting what you need to know before investing in Unilever (LSE: ULVR) (NYSE: UL.US).

New markets continue to shake

Unilever’s sprawling presence across the globe gives it a terrific wingspan across Asia, Africa and Latin America amongst other lucrative places. So although the firm’s stableUnilever of industry leading brands is keeping the top-line moving in the right direction — sales from developing regions rose 6.6% during January-March — intensifying competition and deteriorating consumer spending power are causing activity to decelerate.

Indeed, growth during the period compares starkly with the 10.4% advance posted in the corresponding three months of 2013. Emerging markets account for more than 55% of group sales so signs of slowing till rolls here are a big deal for group revenues — these slipped 6.3% revenue during quarter one, to €11.4bn.

Europe remains a sticking point

But weakness in developing regions is not the only headache for Unilever, as poor trading conditions in Europe — responsible for more than a quarter of total turnover — continue to reign. The company saw sales stagnate during quarter one, rising just 0.1% while volumes advanced just 1.1%.

And latest data from Eurostat revealed that Unilever should not expect a solid improvement in shopping trends any time soon — aggregated retail sales in the 28 European Union states slipped 0.1% during May on seasonally-adjusted month-on-month basis

A dicey dividend outlook?

Despite a murky sales outlook, however, City analysts expect Unilever to grow last year’s dividend of 109.49 euro cents per dividend to 113.9 cents this year and again, to 122 cents, in 2015. These figures create yields of 3.5% and 3.7%, peeking above a FTSE 100 forward average of 3.3%.

Still, I believe that bare dividend coverage of just 1.4 times prospective earnings through to the end of next year — some way off the safety watermark of 2 times or above — should prompt some investor concern in my opinion.

And even though a series of brand divestments in recent months — particularly across its Foods division, like that of Slim Fast just last week — have boosted the balance sheet considerably, further dividend hikes could fail to materialise should sales weakness last. Net debt rose to €8.5bn last year from €7.4bn in 2012.

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Royston Wild has no position in any shares mentioned. The Motley Fool owns shares of Unilever.