Unilever: Defensive Global Play

05/23/2016 7:00 am EST


Khoa Nguyen

Investment Analyst, Investing Daily

With the global recovery still in doubt, consumer staples companies are a good refuge because their products are always in demand whether the economy is doing well or not, asserts Khoa Nguyen, editor of Global Income Edge.

And our favorite Global Income Edge consumer defensive play, Unilever (UL), has a 3.25% dividend yield and should weather the current environment.

At a market cap of $128 billion, the Anglo-Dutch company, co-headquartered in Rotterdam and London, is the world’s third-largest consumer staples.

It owns more than 400 brands and is represented in 190 countries. Its line-up of famous brands includes Dove, Hellmann’s Mayonnaise, Lipton Ice Tea and Ben & Jerry’s ice cream.

While Unilever has a strong presence in the US and Western Europe, its business is weighted more toward emerging markets where it has operated for several decades.

Emerging markets accounted for about 58% of its business last year. Asia, Africa and the Middle East have higher consumer spending growth, and these markets helped drive much of Unilever’s growth.

The quantitative easing measures in the European Union last year allowed Unilever to raise cheap capital to fund its growth investments.

Unilever is essentially accessing capital for free, which can be used to further expand the business.

Considering that Unilever has delivered almost continuous returns on equity of between 7% and 9% over the last five quarters, this capital will further boost earnings, which ultimately lead to higher dividends.

Unilever’s dividend payments only account for about 67% of earnings, presenting it with plenty of flexibility to increase payouts. During the first quarter, the company demonstrated this by raising its dividend 6% to 0.3201 euros per share.

With Unilever’s business growing steadily, it will be able to maintain the dividend in the foreseeable future with the possibility of hikes.

The share price stayed relatively flat the past 12 months, leaving the price-to-earnings ratio at 22. This is historically high, but as investors pile into defensive stocks, Unilever trades at a discount to its peers.

With a safe 3.25% yield, Unilever is a strong long-term holding for income investors.

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By Khoa Nguyen, Editor of Global Income Edge

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