Dividend Growth Investing in European Stocks
Long term oriented dividend growth investors that have created resilient stock portfolios churning out a steadily increasing stream of cash flows in form of dividends, often are positioned in the so-called Dividend Aristocrats which commonly refers to
- a US company that is a member of the S&P 500 index
- that has increased its dividend for at least twenty-five consecutive years in a row.
These are businesses for patient buy and hold investors that want to see dividend growth plus book gains over time. These are the enterprises to see as the backbone of a conservative share portfolio, companies with characteristics such as
- a broad economic moat, underpinned by a portfolio of iconic brands
- a durable, capital light business model giving these companies
- the ability to consistently generate superior cash flows that
- not only outperform its peers in growth due to their superior global footprint, innovation dynamics and brand power but also
- show a long standing track record of sound an prudent financial decisions,
- a dividend history showing many years of steadily increasing shareholder payouts and
- several catalysts for growth.
These businesses certainly belong to the best dividend stocks for your portfolio.
But as we have covered in our article “Are there any European Aristocrats?”, there is a very nice group of businesses that show exactly the same characteristics as their US-American peers. Companies such as Swiss pharma giants Novartis and Roche, Fresenius, and of course the two giants Nestlé and L’Oréal.
These two belong to the Top 10 European Dividend Stocks.
I mean Nestlé and L’Oréal easily play in that same league of prestigious companies investors are eager to have a stake in. Nestlé is the world’s largest food company and the number two beverage company, it sells as much coffee as does Starbucks. Nestlé has been paying out dividends since 1959 and has steadily increased its payouts since 1986. French cosmetic giant L’Oréal has been paying out growing shareholder distributions since 1988.
L’Oreal and Nestlé are certainly worth a closer look, not only because of their unique business characteristics but also because these companies are connected to each other, making them even more interesting and more compelling as an investment case.
Taking a closer look at L’Oréal the global number one cosmetic business
Nestlé is the second largest shareholder of L’Oréal
Around 23 % of the world’s largest personal care and cosmetics giants are owned by the global food and beverage giant Nestlé. Just let that sink for a moment.
Nestlé not only
- is the largest food producer in the world,
- it is also one of the major players in the coffee sector with interesting joint ventures partners such as Starbucks,
- furthermore Nestlé is the third largest beverages producer (after Coca Cola and PepsiCo)
- and particularily interesting: Nestlé owns roughly one quarter of the strongest, most iconic beauty and cosmetic company L’Oréal.
The Bettencourt, descendants of the founder Eugène Schueller, own around 27 % via holding companies.
The rest (approximately 50 %) of L’Oreal shares are free float.
A truly unique brand portfolio
L’Oréal is structured in four divisions.
Under the umbrella of L’Oréal Luxe, the company unifies a breathtaking group of illustre names, just to mention some of them:
- Georgio Armani,
- Yves Saint Laurent,
- Ralph Lauren
But L’Oréal owns much more companies and brands. It’s Consumer Products divisions combine
- Maybelline New York
- L’Oréal Paris
just to name a few of them.
In its third division Active Cosmetics, L’Oréal sets its focus on skincare and you can find names such as
- La Roche Posey
and several more.
Active Cosmetics is the world leader in derma cosmetics, with six international skincare brands recommended by health care professionals and distributed in healthcare outlets worldwide, including, pharmacies, drugstores, medi-spa, and e-retailers.
With its fourth division – Professional Products – L’Oréal sets its focus to support hairdressers and develop the hair industry sustainably and while benefiting all. Professional Products founded the L’Oréal group more than 110 years ago. That division amongst others includes brands such as
- Professional L’Oreal,
- Matrix and
L’Oreal’s 9 % stake in French pharma giant Sanofi
Sanofi (Sanofi-aventis Groupe) is a multinational pharmaceutical company headquartered in Paris. It’s a huge business with 100’000 employees worldwide, annual revenues of around USD 40 Bn annually, and an operating income of roughly USD 18 Bn.
Sanofi is the result of several mergers and acquisitions. In 1999 the French oil company Elf Aquitaine and L’Oréal merged their pharmaceutical subsidiaries, forming Sanofi-Synthélabo. In 2004 that combined company acquired French pharma company Aventis to form a true European pharma giant.
Few people know, that L’Oréal holds roughly 9 % of that company. So, always keep in mind that in addition to huge cash inflows from its core business, L’Oréal receives cash dividends from Sanofi each year.
L’Oréal’s exceptional business fundamentals
Besides the fact, that L’Oréal owns 9 % of one of the strongest pharma businesses in Europe, L’Oréal has an absolutely amazing underlying business.
L’Oréal is a very capital-light cash machine. The company spends a relatively small amount on chemicals that constitute their cosmetics yet L’Oréal spends billions each year in advertising.
L’Oréal’s brand equity is breathtaking, it clears something like 60 % of revenues as gross profit – just think about that, it shows how much of a money machine L’Oréal is.
Its dividends are very well covered by 1.8x of the company’s Free Cash Flow from operating activities. But here again, also bear in mind L’Oréal’s 9 % stake in Sanofi, from which it receives growing distributions every year. L’Oréal has sat a net cash position of around USD 6 Bn on its balance sheet.
Revenues at L’Oréal come in at around USD 40 Bn annually resulting in a net income of roughly USD 6 Bn in net income. As said, the main expenses can be contributed to marketing, strengthening brand empire, giving its economic moat a huge scale.
L’Oreal’s share price dynamics over the long run
L’Oréal stock has been an incredible wealth creator over the last decades. Not only has the stock price dynamics been on a very nice upward trend for many years, but there is of course also a compelling dividend history on the back of steadily increasing shareholder payouts since 1988.
Given the high-quality nature of L’Oréal, it’s certainly not surprising to see such a stock price chart which is pretty in line with the development of the business fundamentals and growth trajectory.
With a Price Earnings Ratio of around 50 and a dividend yield of 1 %, the stock looks rather expensive. It seems like the share has a bit run ahead of the future growth prospects. Well, here it’s just simple as that: investors can always put companies they like on their watchlist and wait until they see an interesting entry price. Just think of a market drawdown of around 20 % – which can always easily happen – and you are looking at a PE-Ratio of 30, which is more in line with the long-term average. Put in a growth rate of 10 % and we are moving in a more attractive PE area in the high twenties.
Europe is home to some of the best dividend-paying stocks that build the foundation for sustainable and growing passive income streams. Companies like Swiss food and beverage giant Nestlé and French L’Oréal, which we covered in more detail in this article. The global footprint of that European dividend aristocrat with over 30 years of history of increasing shareholder rewards is unmatched. L’Oréal has consistently shown superior growth to its peers on the back of an incredibly strong and diversified distribution network built around an unmatched portfolio of iconic brands. L’Oréal stands for quality in personal care products but also in luxury. And clearly quality has its price.
The beauty of investing is the fact that the stock market can be used efficiently to take a stake in wonderful businesses. Short term, the popularity of pieces of businesses – aka shares – can fluctuate, which gives the opportunity to buy quality at a fair price. It just requires some patience, to see a stock price level where one feels comfortable.
You are responsible for your own investment and financial decisions. This article/video is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.