Relative calm may have returned to the markets, but looking at the bigger picture, little has changed. Volatility is still just around the corner. So it could be time to look at the way defensive stocks protected your portfolio last month and top them up. Two great companies are going ex-dividend on Thursday, so if you’re making up your mind whether to buy into them, here are a few pointers.
Unilever (LSE: ULVR) has increased its dividend payout this quarter by 5% compared to a year ago and investors will receive 30 cents on 9 March.
Unilever is a great defensive play to add for the long term. The world might blow up, but people will always buy food, soap and shampoo. Its recent results really highlight this because, despite falling inflation pressurising consumer product prices, the multinational executed effective strategies to grow its business markets that were showing signs of weakness.
Sales in emerging markets rose 7.1%, helping to take the sting out of a 6% decline in pre-tax profits. Meanwhile, the brand loyalty campaigns Unilever mounted in the UK proved effective as a fightback against falling food prices.
Will currency weakness begin to hurt?
Risks for Unilever include the continued deflationary trend globally and a weakening US dollar, because Unilever reports in euros but makes most of its sales in dollar areas. When the dollar is strong, this contributes significantly to the bottom line. But dollar strength is no longer a given, especially with the Fed indicating last week that it places greater emphasis on ‘global factors’ before raising interest rates again. This means that when the yuan weakens, it can even drag down the dollar. Crazy, but true.
Unilever’s 2.9% dividend yield might look feeble, but this also means the company is prudent in not over-promising and is making sure the cover is rock solid (1.9 times). With a P/E of 23 and the stock weathering the January sell-offs remarkably well by remaining flat, I believe this is still absolutely a great buy.
Weathering the storm
Imperial Tobacco Group (LSE: IMT) stock goes ex-dividend on Thursday 4 February and the company pays a dividend of £0.49 per share on Thursday 31 March.
Imperial will soon be faced with a brand loyalty challenge as the UK government plans to ban graphics on the outside of cigarette packets. However, it’s unlikely to impact the world’s fourth-largest cigarette company much. It’s going from strength to strength, mostly due to foreign sales. It realised a 15% rise to £1.76bn in pre-tax profits for the year to the end of September 2015.
Like Unilever, the US is a key market for Imperial. And as the British pound is less of a ‘safe haven’ currently than the euro, it looks like Imperial’s future earnings are somewhat less prone to currency risks than Unilever’s. A slump in emerging markets is also less of a threat to Imperial than Unilever as people will always smoke despite economic downturns.
There’s everything to like about Imperial. The company has committed to paying more regular dividend yields, and currently pays 3.74%. Its stock was impervious to January’s market turbulence too, holding on to its 20% gains over the past 12 months. I would say, go buy it!
