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HUL: The dividend leverage

Mar 16, 2009

In the previous article in the dividend series, we had discussed the application on Nestle India, of a frame work through which one could achieve returns entirely from dividends. In this article, we shall discuss the dividend record of Hindustan Unilever and apply the same frame work. Hindustan Unilever (HUL), 51% owned by Unilever, is India's largest FMCG company in terms of revenues, with a dominant presence in almost all consumer categories. The company's turnover at around Rs 140 bn is over one third of the total branded / organized FMCG business in India. The brand equity of its products remains virtually unrivalled. HUL has embarked on a major restructuring exercise, focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs or spin-offs. Its key strengths include extensive distribution network, powerful brand equity, strong balance sheet and high-quality management.

HUL has been continuously rewarding its shareholders with dividends during the past two decades. The company has been known for maintaining a higher dividend payout ratio. The average dividend payout ratio during the last 19 years stood at an outstanding 69%. This is quite an impressive achievement as the company had also managed to keep its average RONW during the same period at around 47%.


Source: CMIE
* Issued bonuses in CY91 and CY03

The company's dividend per share has grown at a CAGR of 20% per annum during the last 19 years, while its earnings per share growth stood at a CAGR of 16% during the same period. This points out towards the fact that the company has always been liberal in terms of rewarding its shareholders. Given this long history, there is very little chance that the company might stop paying dividends to its shareholders in the future.

At the current price level, the dividend yield for HUL is around 4%. Assuming the company continues to grow its dividend per share at 20% per annum, the investor would be able to get a 10% return annually on his investment from dividends alone from the 5th year onwards. This can be backed by the fact that HUL has a very negligible capital expenditure requirement and a high asset turnover ratio. It may be also noted that HUL had around Rs 12 bn of cash in its reserves at the end of CY07. Also, dividends are the only way with which HUL can repatriate profits to its parent company Unilever.

Conclusion
A descent 4% dividend yield, healthy cash reserves and a sustained growth is likely to make HUL a steady dividend income generator for a long term investor. However, investors should bear in mind that the above desired returns can be achieved only if one stays invested in the company from a long term view. Moreover, it is important that management policies and the environment in which company operates remains unchanged.

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