Lloyds above Unilever for income shares

Income investors look for some sense of clarity, confidence or even certainty about the dividend stream they can expect from shares. While history and capital allocation policy can tell us a lot, there are often plenty of other issues at play that can fog the outlook. Banks are inherently cyclical businesses and consumer staples should be stable but, ironically, Lloyds arguably has a more certain outlook than Unilever.   

Lloyds Banking Group (LLOY)  – The UK’s banks are doing much better as the pandemic shrinks further in the rear view mirror. What could be sustainably higher interest rates mean a wider basic net interest margin (NIM), but moving from an ultra-low rate period also means that higher returns can be baked into the ‘structural hedge’. Lloyds looks to be capable of sustaining a NIM above 3 per cent, perhaps even nudging 4 per cent, which should push the key Return on Tangible Equity (RoTE) up into the mid-teen percentage range. This should mean growing capital surpluses and a well-funded and rising cash dividend for easily three and potentially five years to come. 

Unilever (ULVR) – this large, global food, home products and personal care business has shown a very strong dividend record, dipping only once and by a small amount during the global financial crisis (GFC). After around five years in the doldrums trends have begun to pick up. However, there is new management and a new strategy – no more big transformative acquisitions, potential spin-off of poorer divisions, potential single brand sales and a focus on pushing up the quality rather than the quantum of the earnings. In such a potentially large-scale re-casting of the business it becomes very hard to be confident of future dividends and total shareholder return (TSR).