Some dividends have staying power. Companies delivering enduring dividends tend to back such often-rising payouts with robust business and financial achievement.
Meanwhile, it seems best to avoid fragile dividends that arise because of weaker operational and financial characteristics. However, fragile dividends often tempt me because of high dividend yields.
How to tell the difference
Under the spotlight today, two FTSE 100 firms: Unilever (LSE: ULVR) the consumer goods business and BT Group (LSE: BT.A) the telecoms provider.
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These firms operate in different sectors, but they both have a reasonable dividend yield. At the recent share price of 2,847p, Unilever’s forward yield for 2016 is 3.2%. At 460p, BT’s is 3.3% for the year to march 2017.
Here are some tests to gauge business and financial quality. Each scores performance out of a maximum five.
-
Dividend record
Unilever’s dividend has been slipping, but BT’s dividend growth is impressive.
|
Ordinary dividends |
2011 |
2012 |
2013 |
2014 |
2015 |
|
Unilever (cents) |
77.61 |
78.89 |
91.05 |
90.2 |
88(e) |
|
BT Group (pence) |
8.3 |
9.5 |
10.9 |
12.4 |
13.9(e) |
Over four years, Unilever’s dividend advanced around 13%. BT’s moved forward by 67%.
For their dividend records, I’m scoring Unilever 3/5 and BT 5/5.
-
Dividend cover
Unilever expects its 2016 adjusted earnings to cover its dividend around 1.5 times. BT expects cover from earnings just over two times. I like to see earnings covering the dividend at least twice and ideally more.
However, cash pays dividends, so it’s worth digging into how well, or poorly, both companies cover their dividend payouts with free cash flow too.
On dividend cover from earnings, Unilever scores 3/5 and BT 4/5.
-
Cash flow
Dividend cover from earnings means little if cash flow doesn’t support profits.
Here are the firms’ recent records on cash flow compared to profits:
|
Unilever |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Operating profit (€m) |
6339 |
6433 |
6977 |
7517 |
7980 |
|
Net cash from operations (€m) |
5490 |
5452 |
6836 |
6294 |
5543 |
|
BT Group |
|
|
|
|
|
|
Operating profit (£m) |
2578 |
2919 |
2948 |
3145 |
3480 |
|
Net cash from operations (£m) |
4566 |
3558 |
5295 |
4796 |
4796 |
Unilever’s consumer goods business, with its repeat-purchase credentials, delivers steady cash flow that generally supports profits. BT stands out however with its powerful cash flow ahead of profits.
I’m scoring Unilever 3/5 for its cash flow record and BT 5/5.
-
Debt
Interest payments on borrowed money compete with dividend payments for incoming cash flow. That’s why big debts are undesirable in dividend-led investments.
Unilever’s gross debt runs at around twice the level of its operating profit and BT Group carries a debt load equal to just under four times its operating profit.
I’m awarding Unilever 4/5 and BT 2/5 for their approach to borrowings.
-
Degree of cyclicality
Unilever is arguably less cyclical than BT. In economic collapse, consumers are more likely to cut back on telecom services than they are to stop eating or using cleaning products.
Unilever scores 4/5 and BT 3/5.
Putting it all together
Here are the final scores for these firms:
|
|
Unilever |
BT Group |
|
Dividend record |
3 |
5 |
|
Dividend cover |
3 |
4 |
|
Cash flow |
3 |
5 |
|
Debt |
4 |
2 |
|
Degree of cyclicality |
4 |
3 |
|
Total score out of 25 |
17 |
19 |
BT Group wins this face-off, but both firms score quite well.
