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Popular dividend share Unilever (LSE: ULVR) didn’t see much price movement Thursday (31 July) after first-half results. It was hovering around 0.5% to 1% up for most of the day.
This is a year of change as the company seeks to remedy relatively weak past performance. It includes the planned spin-off of its ice cream business, with Ben & Jerry’s and Magnum among key brands. The demerger, to produce The Magnum Ice Cream Company, should happen by November.
Perhaps ironically, the Ice Cream division led the way on underlying sales growth in the half. At 5.9%, it was ahead of the second-placed Personal Care division with a 4.8% rise.
Underlying operating profit declined 4.8% over last year, to €5.8bn. But it was slightly ahead of the expected €5.7bn.
The weak reaction on the day largely reflects the past five years. The share price has essentially moved sideways overall, although it wasn’t without some volatility along the way.
It does look like it might be some time yet before Unilever’s changes have a positive effect. But CEO Fernando Fernandez made the priorities clear: “More Beauty & Wellbeing and Personal Care; disproportionate investment in the US and India; and, a sharper focus on premium segments and digital commerce.”
The company wants to boost its premium brands, which typically generate better margins. Other companies in competitive consumer markets — like British American Tobacco — have a similar aim. And I reckon it could be just the right approach for getting Unilever back on track.
What next?
The share price weakness of the past few years has had one beneficial effect. It’s helped keep dividend yields that little bit higher. Forecasts suggest 3.4% for the current year. That might not look so good. But I rate it as attractive for one with such long-term progressive prospects. And it seems set to creep over 4% by 2027.
Dependability is key for a dividend like this. And for me, part of that comes down to cover by earnings. It’s been ranging from around 1.3 times to 1.5 times in recent years. And forecasts suggest more of the same, at 1.4 times by 2027.
Unilever has good visibility of sales of its huge range of essential consumer goods. And it doesn’t need huge amounts of capital expenditure. In the latest update, the company said it expects cash conversion of around 100% in 2025. Putting those together, I’d rate dividend cover as more than adequate.
What to do?
The main thing that counts against Unilever for me is the valuation. We’re looking at a forward price-to-earnings (P/E) ratio of close to 20 this year. There are long-term safety aspects in a stock like this, as essentials consumption tends to hold up in any downturn. And that can justify a premium. But these are uncertain times for the company’s refocus. And I fear that multiple might be a bit high right now.
I personally won’t buy now based on that valuation. And that’s even though I do think long-term income investors might do well to consider it.
