3 ‘wide moat’ dividend stocks: Unilever plc, Reckitt Benckiser plc & British American Tobacco plc

Image: Unilever. Fair use.

Today, I’m taking a look at the dividend prospects of three “wide-moat” stocks.

Reliable dividends

Unilever (LSE: ULVR) has earned its wide economic moat by building brand value through creative marketing and continued product innovation. Its diverse portfolio of food, household and personal care products gives the company the sector diversification it needs to generate stable cash flows, which pays for its reliable dividends.

With 43 consecutive years of dividend increases under its belt, the company has one of the longest dividend growth streaks in the FTSE. Looking forward, city analysts expect its dividend will rise by 6% this year and a further increase of 5% next year. This would give its shares prospective dividend yields of 3.2% and 3.4% for 2016 and 2017, respectively.

Granted, slowing food sales is a drag on recent earnings growth. But, the company is looking to diversify away from food products and expand sales in the faster growing personal care products market. Recent acquisitions in this space will mitigate slowing growth and analysts seem optimistic about its future growth prospects. City forecasts point towards 3% earnings growth in 2016, with a further 9% expansion in 2017.

Marketing strength

Like Unilever, Reckitt Benckiser’s (LSE: RB) wide economic moat stems from the value of its brands. And key to Reckitt’s success in developing brand value has been its marketing strength. Reckitt is an early adopter of digital and social media, and the company spends a larger proportion of its revenues on marketing than its peers. But despite higher levels of spending, it maintains a cost-obsessed focus and only makes investment decisions that meet its strict return-on-investment criteria.

The success of this marketing strategy is clearly visible in its lead in operating margins. Reckitt’s 26.8% operating margin is well ahead of its peers in the consumer goods sector, including Unilever and US giant Proctor & Gamble, which have margins of 14.8% and 21.1%, respectively.

On a valuation perspective, Reckitt trades at a forward P/E of 24.2. This seems rather expensive given that its 5-year historical average forward P/E is 18.1. And that’s despite forecasts of slowing growth – underlying EPS is forecast to grow 5% this year, and 9% in the following year. At present, Reckitt yields 2.1%.

Addictive nature

In addition to brand value, British American Tobacco (LSE: BATS) benefits from the addictive nature of smoking. This means that demand for its tobacco products are fairly price inelastic, which gives the company very considerable pricing power. It has enabled British American Tobacco to continue to deliver earnings growth, even though cigarette volumes have been steadily declining.

Falling cigarette volumes is a major headwind risk, but this is partly offset by rising disposable income in emerging markets, which could potentially lead to more sales and support higher prices. The cigarette maker has a great track record of delivering robust dividend growth. Dividends in the past three years have increased at a compound rate of 4.7% annually, and looking forward analysts expect more of the same. Forecasts point towards a 4% dividend growth this year, with shares trading at a prospective dividend yield of 3.9%.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever and has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.