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Why I think the Unilever share price has the best dividend in the FTSE 100

Roland Head
Various denominations of notes in a pile

The Unilever (LSE: ULVR) share price has bounced back quickly from the stock market crash. Shares in the FTSE 100 consumer goods group are now trading at the same level as on 3 January. In contrast, the FTSE 100 is still down by around 15%.

I’m pretty sure that one reason for Unilever’s rapid recovery is the quality and reliability of the group’s dividend. While many big FTSE names have cut or suspended their payouts since March, Unilever has not.

Boss Alan Jope felt confident enough to leave the first-quarter dividend unchanged in April, despite committing €500m of cash flow to support the group’s suppliers.

I reckon Unilever shares could offer the best dividend in the FTSE 100. Here are three reasons why.

Over 30 years without a cut

One of the top requirements for a good dividend stock is reliability. Many income investors use their dividend cash to provide an income. A sudden cut without warning is bad news.

Unilever has not cut its dividend since at least 1988. I think the true figure is much longer, but to be honest I don’t have the time to search through dozens of historic annual reports.

In any case, a 30-year record is enough to put Unilever shares in an elite group of FTSE 100 stocks with a dividend streak of more than 20 years.

The Unilever share price provides a decent yield

Some FTSE 100 stocks have long histories of dividend growth, but their dividend yields are just too low for me to be interested. Even in today’s low interest rate world, I don’t think a yield of less than about 2.5% is much use if you’re looking for a cash income.

Happily, Unilever’s share price is low enough to give the stock an attractive yield. Even after the recent rebound, the shares still offer a dividend yield of around 3.5%.

That looks attractive to me, especially as the firm’s payout has doubled over the last 10 years alone. Unilever’s share price reflects this strong performance – the stock has doubled over the last eight years.

An affordable dividend

If Jope cut the payout, I’m pretty sure the Unilever share price would tank. Companies don’t like to cut their dividends, as it signals a lack of confidence. Unfortunately, this means that payments are sometimes maintained, even when they’ve become unaffordable.

The easiest way to test the affordability of a dividend is by comparing it to a firm’s earnings per share. Ideally, earnings per share should be significantly higher than the dividend, so the company can reinvest some its profits in growth or perhaps repay debt.

On average, Unilever’s earnings have covered its dividend about 1.5 times over the last six years. For a stable, defensive business, that seems comfortable to me.

A second, tougher test of affordability is to look at a company’s free cash flow. This is the actual surplus cash generated by the business each year. Ideally, you want dividends to be covered by free cash flow as well as accounting profits. Unilever scores well here too, with consistently strong cash generation over the years.

My verdict?

Although Unilever’s share price of £44 values the business at 20 times forecast earnings, the 3.5% dividend yield still looks attractive to me. I think this could be the best dividend stock in the FTSE 100 and would rate the shares as a buy.

The post Why I think the Unilever share price has the best dividend in the FTSE 100 appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and 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.

Motley Fool UK 2020