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Here’s what I think is next for Unilever’s dividend

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Unilever (LSE:ULVR) is a leading consumer products company with numerous competitive advantages. Given its immense scale, the company has financial resources that few competitors can match. And as an indication of its strength, Unilever has held up fairly well in 2020, despite the pandemic. 

According to analyst estimates, ULVR’s underlying earnings per share (EPS) should decline just 2.1% for full-year 2020. 

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So given the expected economic rebound next year, what’s ahead for the dividend? Here’s what I think. 

Unilever dividend: what might happen next year

Currently, Unilever pays a trailing 12-month annual normal dividend per share of around 145p. That’s a 3.3% dividend yield at current prices. And it has good dividend coverage as analysts expect the company to earn €2.49 (229p) in underlying earnings per share for 2020.  

So in 2021, I think the company will very likely increase the dividend given the flexibility in the payout ratio that it has and the fact that analysts on average expect the company’s underlying EPS to rise by 3.4% in euro terms. 

Attractive qualities as a dividend-payer

Looking past 2021, I think ULVR’s dividend per share will continue to increase modestly — as long as the company continues to perform, of course. 

Overall, the business has a number of attractive qualities as a dividend-payer. First, demand for ULVR’s products does not decline as much as the demand for products of some other companies during tough times. Unilever products are relatively cheap, but they are also brands that enjoy strong loyalty. Consumers continue to buy them, even during a recession. 

Second, ULVR has a history of dividend growth with the company having consecutively raised its annual payout for over three decades. That history is a clear sign that management priotises dividends for shareholders. 

Perhaps most importantly, management has also executed pretty well. Over the past five years, the Unilever stock price has increased by almost 50%. Adjusted earnings per share have increased by 47% from 2015 to 2019.  

M&A in the future?

One action I think Unilever management might take in the future is accelerating its M&A strategy. 

Recently, the group unified its complex legal structure under a single parent company so that its legal base is in London. Many believe Unilever did so to make M&A easier.

Chairman Nils Andersen recently confirmed as much, saying that the unification would “give us greater flexibility for strategic portfolio change“.

If management does the right deals, I think there is potential for the company’s earnings per share to rise faster than expected. If that happens, the dividend could grow faster than the market expects too. 

Such deals can always go wrong, of course, but the company has executed very well in this area so far. And there is nothing to suggest it will not do so in the future.

So I would buy and hold ULVR in the belief that the company will continue to modestly increase its dividend per share. If I hold for long enough, those modest rises will add up to a big bonus in the years ahead. 

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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