Are Unilever plc & J Sainsbury plc Great Dividend Picks For 2016 And Beyond?

Is now the perfect time to buy Unilever plc (LON:ULVR) and J Sainsbury plc (LON:SBRY).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We’ve seen a number of FTSE 100 firms cut their dividends this year, and City analysts reckon more companies could follow suit in the year ahead.

Today, I’m looking at whether Unilever (LSE: ULVR) and J Sainsbury (LSE: SBRY) could be dividend-disappointers or great picks for 2016 and beyond.

Unilever

Consumer goods giant Unilever is powered by a stable of great brands, across the food and drink, household cleaning and personal care categories. Combine the brands with global scale, including excellent exposure to emerging markets — where rising incomes will provide a tailwind for decades to come — and you’ve got a top-class business capable of delivering reliable long-term growth.

Should you invest £1,000 in Sainsbury's right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Sainsbury's made the list?

See the 6 stocks

The table below shows some key earnings and dividend data (in the Anglo-Dutch company’s reporting currency of euros).

  2012 2013 2014 2015 forecast 2016 forecast
Earnings per share (€) 1.53 1.58 1.61 1.84 1.92
Dividend per share (€) 0.97 1.08 1.14 1.21 1.28
Dividend cover 1.6x 1.5x 1.4x 1.5x 1.5x

As you can see, there is a trajectory of earnings ticking steadily higher each year, and the dividend following suit with cover maintained at around the 1.5x level.

The earnings progression is actually even smoother than the numbers above suggest, if you remove the volatility of exchange-rate movements. For example, 2014’s 2% earnings per share (EPS) growth would have been 11% but for a 9% adverse currency impact, while 2015 is showing the reverse effect: at the half-year stage Unilever reported 8% EPS growth bumped up to 16% by an 8% positive currency impact. Even with swings in exchange rates, though, Unilever’s upward progression of EPS — and the dividend — is more consistent than you’ll find with many a company.

Having said all that, for UK investors there is the additional variable of the euro/sterling exchange rate when it comes to the dividend, which sometimes works for and sometimes against UK investors.

For the current year, Unilever is shaping up to deliver a sterling dividend of around 86.8p, giving a yield of 3% at a recent share price of 2,880p. For 2016, the yield rises to 3.1%, with a 90.1p dividend forecast based on current exchange rates.

Unilever’s yield is a long way from being the highest in the market, but I believe the potential for long-term reliable growth makes the company a great dividend pick for 2016 and beyond.

Sainsbury’s

The exchange rate on dividends is one thing that doesn’t come into play with UK supermarket Sainsbury’s. However, despite selling the kind of products Unilever makes, Sainsbury’s dividend history and outlook are far less impressive than that of the consumer goods producer.

The table below shows some key earnings and dividend data for Sainsbury’s.

  2012/13 2013/14 2014/15 2015/16 forecast 2016/17 forecast
Earnings per share (p) 30.8 32.8 26.4 22.0 21.6
Dividend per share (p) 16.7 17.3 13.2 10.8 10.6
Dividend cover 1.8x 1.9x 2.0x 2.0x 2.0x

As you can see, Sainsbury’s earnings hit the buffers in 2014/15, and are set to fall further this year and next. Management took a decision not to maintain the dividend in the face of falling earnings (which would have reduced cover), but to maintain cover of 2x (thus reducing the dividend). As such, the 13.2p payout of 2014/15 was 24% below the previous year, and further cuts are forecast: 18% this year, followed by 2% in 2016/17.

The supermarket sector has become more competitive than ever in recent years. A big weekly shop at a family’s favourite out-of-town superstore is now largely a tradition of a bygone era. With no-frills upstarts Aldi and Lidl gaining market share hand over fist, Waitrose and local upmarket grocers thriving, and new entrants in the online food space, revenues and margins are under pressure at Sainsbury’s (and the other big mid-market players).

Sainsbury’s current-year forecast dividend of 10.8p gives a yield of 4.2% at a recent share price of 256p. However, with poor prospects of near-term dividend growth — and considerable uncertainty about how the sea-change in the supermarket industry will impact Sainsbury’s profitability in the longer term — I see Unilever as being a much superior dividend pick for 2016 and beyond, despite its lower immediate yield.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »