In this article, I’m going to take a look at two consumer stocks with stable dividend outlooks, but falling share prices.
Pricing pressures
Shares in Unilever (LSE: ULVR) are down 18% from their all-time high of £38, set in October this year, amid concerns of intensifying competition and tough market conditions. The company’s recent high profile pricing dispute with Tesco serves as a microcosm for the challenges it faces with rising input costs and passing on higher prices to consumers.
Graeme Pitkethly, Unilever’s finance director, warned that the price increases being made in the UK were “substantially less” than what will be needed to cover higher costs of production and protect margins, following the fall in the value of the pound and rising commodity costs.
From my perspective, these pricing pressures are unlikely to subside in the near term, but I’m sure that Unilever should ultimately withstand these headwinds given its product innovation and strong brand loyalty. The consumer goods giant has shown its pricing power time and time again, most recently in Brazil, and this demonstrates the stock’s wide economic moat.
In fact, the recent share price fall presents investors with an opportunity to buy Unilever at a slight discount to its historical valuations. Shares in the company currently trade at a forward P/E of 18.8, beating its 5-year historical average of 19.0.
The dividend yield is also reasonable, with shares currently yielding 3.3%, which is one of the advantages of buying on the dip. What’s more, with its dividends covered 1.6 times by earnings (and 1.4 times by free cash flow), Unilever has attractive dividend growth prospects. City analysts expect dividends this year to rise 10% in sterling terms, which is broadly in line with its projected underlying earnings growth.
Low beta
Another stock which seems to be offering steady income is soft drinks maker Britvic (LSE: BVIC).
With a beta of 0.46, the stock benefits from low cyclicality. This means that changing economic conditions have a more limited impact on the value of Britvic’s shares, giving investors a more steady return throughout the economic cycle. That’s because demand for soft drinks tend to stay at a relatively constant level, regardless of changing economic conditions.
Unfortunately, the same could not be said about changes in weather trends, which explains why Britvic has been going through a difficult patch as of late. As soft drinks tend to sell better on warmer days, the unusually poor weather in the UK in June this year has had a significant negative effect on Britvic’s sales performance.
The drinks maker is due to report its full year results tomorrow, and investors should keep an eye on its EBITDA figure, as management had previously guided EBITDA to come in between £180m-£190m.
And importantly for income investors, Britvic’s dividend growth outlook seems secure. City analysts expect underlying EPS will rise 3% to 47.6p this year, which gives it dividend cover of just over 2.0 times. This also implies shares trade at 11.8 times its forecast 2016 earnings, with a prospective dividend yield of 4.2%.
