How Unilever plc Will Deliver Its Dividend

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I'm looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends.

Today, I'm putting Anglo-Dutch consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US) under the microscope.

Dividend policy

Soon after Paul Polman took over as chief executive in January 2009, Unilever announced a new dividend policy to run from 2010 onwards:

"Unilever's policy is to seek to pay an attractive, sustainable and growing dividend to shareholders".

The company said it would move from paying an interim and final dividend each year to paying four quarterly dividends, announced with the quarterly results. The company added that the change would "better align the payments with the cash flow generation of the business".

Dividend delivery

The table below shows the extent to which Unilever has grown its dividend since the move to quarterly payouts. It should be noted that the company's reporting currency is the euro. Thus, the euro dividend is the gauge for measuring performance against policy, while the sterling dividend is at the mercy -- for better or worse -- of prevailing exchange rates.

201020112012
Dividend in EUR0.8320.9000.972
Dividend growth in EUR+5.0%*8.2%+8.0%
Dividend in £0.7120.7610.789
Dividend growth in £+9.5%*+6.9%+3.7%

* Adjusted for change to quarterly dividends

Unilever has delivered a growing dividend -- nicely ahead of inflation -- for euro and sterling investors alike, even though exchange rates have worked against the latter during the most recent two years.

What about the 'sustainable' aspect of Unilever's dividend policy? Let's have a look at free cash flow (FCF). This is the amount of surplus cash generated by a company, available for dividends or other discretionary uses, and is a more difficult number for companies to 'massage' than earnings. The table below shows FCF, gross dividends paid, and how many times the dividend is covered by FCF.

201020112012Total
2010-12
FCF (EURbn)3.373.084.3310.78
Gross dividends FCF (EURbn)2.322.492.707.51
Dividend cover1.5x1.2x1.6x1.4x

As you can see, Unilever's dividend has been comfortably covered by FCF. This means that there's also room for the company to up capital expenditure when required, as in 2011 when management invested in new capacity to support volume growth in emerging markets.

Summing up

Compared with some companies, Unilever's dividend policy is fairly imprecise. However, in practice, the group has delivered growth ahead of inflation, and with the dividend amply covered by FCF.

The starting income Unilever currently offers -- 3.1%, at a share price of 2,862p -- is a long way from being the highest in the market, but the dividend does look one of the more secure and sustainable. For these qualities, though, you'll have to pay a premium price: 20 times this year's forecast earnings.

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