A glance at some outstanding European businesses
If I had to make a list with thirty of the strongest European businesses that made excellent long term stock holdings, creating huge intergenerational wealth for investors, I would certainly choose the following three French company giants for that selection:
- the world largest luxury group Louis Vuitton Moët Hennessey (LVMH),
- the global number one cosmetic company L’Oréal and
- Pernod Ricard, the world second largest spirits maker and one of the most diversified alcohol makers.
When it comes to French giants, I could certainly also add consumer staple business Danone or the Paris-based international luxury and fashion goods group Kering, which holds an amazing portfolio with specialty brands such as Gucci, Yves Saint Laurent, Bottega Veneta, Puma, Ulysse Nardin, etc.
But with LVMH, L’Oreal, and Pernod Ricard,
- investors have a stake in litterally unique businesses
- with an astounding global footprint,
- strong financials,
- many growth catysts and
- an array of iconic brands in their portfolios.
These factors put these companies in a class of their own.
Granted, LVMH and Pernod Ricard are no Dividend Aristocrats which means they have not raised their dividend payouts for more than 25 consecutive years.
But as noted in my article Are There Any European Dividend Aristocrats?, in contrast to US businesses, European companies usually take a different approach when it comes to their dividend policy. In Europe, dividend payouts tend to fluctuate as their distribution policy is “business-driven”, which means that only a certain percentage (usually 30 to 40 % of profits resp. Free Cash Flow) is paid out to shareholders. So, the business developments are passed through to the shareholders. When times are tough (e.g. due to an economic downturn), it’s not uncommon to see lower dividends but also often nice increases when businesses are doing well.
Investors sometimes tend to be unforgiving when it comes to dividend cuts. But think about the following: is it really in the interest of shareholders when for instance US oil supermajor ExxonMobil takes on debts and significantly reduces investments into future growth opportunities just to be able to hike its dividend and to remain in the prestigious league of a dividend aristocrat?
Sometimes, businesses need to invest heavily in order to make the next jump for growth for decades to come. I mean The Walt Disney Company is a great example for a 100-year-old company that transforms itself, further diversifies, and became even stronger than it was before by investing, re-allocating resources, AND suspending its dividend. There is no company in the world with the ability to really challenge Disney’s unique position when it comes to entertainment, its economic moat is just too overwhelming.
Pernod Ricard, like Disney, has been investing heavily in its brand portfolio, in its global footprint in order to build a huge economic moat enabling it to capitalize on that strong position for decades to come.
Company overview on Pernod Ricard
Pernod Ricard owns 16 of the top 100 spirits brands, it has one of the most diversified, most comprehensive, and prestigious portfolios in the alcohol sector. Now, let’s have a view at some of the iconic brands:
- Havana Club Rum
- Absolut Vodka
- Martell Cognac
- Jameson Irish Whiskey
- Ricard Pastis
Pernod Ricard’s products range from
Pernod Ricard SA was created in 1975 through a merger between the two rivaling alcohol producers Pernod and Ricard.
Ricard was founded in 1932 and was a very popular long drink (alcoholic cocktail) maker. Pernod’s history goes back even longer, to 1797 when Swiss founder Henri-Louis Pernod established an absinthe distillery.
Pernod Ricard is the world’s second-largest spirits and wine organization after British giant Diageo (see article Brown-Forman and its rival Diageo).
Pernod Ricard’s portfolio comprises over 200 premium brands. With sales of around USD 10 Bn and an operating income of roughly USD, 1.8 Bn compared to Diageo with USD 14 Bn in revenues and an operating income of around USD 2.5 Bn, it’s evident that Pernod Ricard has the stronger operating margins. This is due to the fact that Pernod Ricard has several premium alcohol brands and practically no exposure to the beer sector in contrast to Diageo which is for instance the owner of the Guinness beer brand.
What differentiates Pernod Ricard furthermore from Diageo is the heavy investments into global expansion, such as China and India. Diageo sets its focus on increasing its Free Cash Flow overtime to support a progressive dividend policy and managed to hike its payouts for more than 20 years. In fact, Diageo will have a 25-year streak in steadily hiking its dividend.
When it comes to the dividend history of Pernod Ricard in contrast, the company gives an interesting picture:
For nearly 20 years, Pernod Ricard has been paying out dividends but the payout has fluctuated not only with the business performance but also with the heavy investments the company made for future growth. Looking at the dividend history, one might say, well in 2002, Pernod Ricard started with paying out EUR 1.80 per share and twenty years later, the payout is roughly EUR 1.30. But this would severely miss the point. Annual revenues and profits grew by the factor seven in that time frame, which corresponds to a compound annual growth rate (CAGR) of around 11 %. That’s quite significant for a defensive business in the consumer staple sector.
Now let’s look at it a bit deeper. From 2002 to 2021, shareholders collected around EUR 36 per share. From 2002 to 2003, the share price stood at around EUR 30 which means that over less than 20 years, 120 % of the purchase price had been returned as dividends. That’s quite significant.
But that does not yet tell the full story. Just let’s look at the stock price chart.
Since 2002, the stock price has increased sixfold which – considering the cumulative dividends – results in a CAGR of 11 % which is pretty in line with the revenue and profit trajectory in that time span.
But the story does not end here: Pernod Ricard is very well positioned for further growth. It’s literally a compounding machine, getting stronger every year, making it an interesting investment idea to consider.
But beware of overpaying for this alcohol jewel. Just wait patiently for a price drawdown, market fluctuations are the friend of long-term investors in the accumulation phase.
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