L’Oréal, the French cosmetics giant, is worldwide known for its cosmetic products and the “Because I’m Worth It” marketing campaign running since 1973. It is the world’s largest cosmetics company and by investors often perceived as an expensive share. Looking forward the question emerges, is “L’Oréal Worth It” and is the company able to catch the required growth wherever it emerges?
In this beauty sector, L’Oréal is indeed an expensive share with a PE ratio of almost 30. The strong brands of the company, the solid dividend policy and growth opportunities in the personal care sector are supporting the high valuation and its share price.
A strong Q4 earnings report
L’Oreal’s (LRLCF) recent Q4 earnings report displayed a strong increase in its cosmetics sales. Also the peers, such as Estee Lauder (EL) and Unilever (UN) reported strong growth. L’Oreal posted its strongest sales growth in more than a decade, beating analyst estimates. Not surprisingly, the “new markets” were the strongest growth driver, with sales in the Asia-Pacific region up by more than 24%. For 2018 as a whole, operating profit rose with 5.3% to €4.7 billion.
Source: L’Oreal annual results 2018
The operating sales margin is 18.3%, a bit up from 18% at the end of 2017. Also, the earnings per share rose 6.5% to 7.08 euros. As a result, L’Oreal proposed to increase its dividend with 8.4% to €3.85 from € 3.55.
L’Oreal’s share price has had already a run ahead of good results and is currently trading around it’s all-time-highs.
Market Leader in a growing market
L’Oréal is active in all cosmetic market segments and number 1 cosmetics group worldwide in 2018 according to WWB. The four major business divisions are consumer products, L’Oréal Luxe, Professional products, and active cosmetics. The product portfolio includes 34 well-known brands, such as Garnier, Maybelline & Lancome and is sold in 150 countries.
The worldwide beauty market has strong underlying trends and accelerated in 2018. The growth for 2018 has been the best growth in 20 years, +5.5%. By geography, growth was stable in Western Europe, around 5% in North America plus Eastern Europe, Asia Pacific was up 10%. Looking by sector, Travel retail +22% and e-commerce +25% performed well, resulting in an increase of 9% in Skincare products and 5% in makeup.
Digitalization and e-commerce are underlying trends of the beauty market acceleration. It is extending the reach far beyond the traditional distribution, especially in new growth markets. Demand for makeup is strong among the millennials generation and in less mature market such as Asia, Middle-East and Africa will continue to grow with a beauty consumption per capita index below 20. A great digital example is L’Oreal’s top 3 ranking on Tmall Singles’ Day (11/11/2018).
L’Oreal is a market leader in a growth market which nice, but how will they maintain this? Let’s have a look at their strategy. The company defined the following 5 founding principles:
- Superior quality of their products
- Increase research and innovation
- Topline growth and focus on operational/ costs discipline
- Catch the growth wherever it emerges
- Lead in sustainability and ethics
From my point of view, increasing the investments in research and innovation is essential to maintain growth and stay ahead of the competition. L’Oreal’s R&D expenses are still growing, so this is a positive sign. The payout ratio which is 54.4%, leaves sufficient room to keep the R&D amounts growing the coming years.
An interesting principle is the “Catch the growth wherever it emerges”. Digitalization should be an accelerator for growth, even in the cosmetic industry. L’Oreal’s ambition is to become “the leader of the new beauty tech world”. Which is an interesting statement and the digital figures presented during the annual meeting surprised me somewhat and shows that they are really acting on this trend. The digital facts are impressive, 1.2Bn website visitors,43% of media spend is on digital, ⅓ of the global beauty views on YouTube are with L’Oreal. The company invested to train 22,000 employees on digital to embed this in the organization and on top 2,000 digital experts are working at L’Oreal.
Growth will also come from new markets. The beauty market has still many white spaces and potential growth. As market leader, L’Oreal is well positioned and able to grow significantly in those new markets. Asia, middle-east and Africa are the most interesting markets.
Nevertheless, marketing costs are also expected to increase to defend market share in for example China. Japan is one of the biggest markets with respect to skin care products, L’Oreal seems to lose some traction there.
Dividend Policy
L’Oréal has a very long-lasting dividend tradition. The dividend payment in 2019, will be the 38th year of consecutive dividend increases. This makes L’Oréal a true European Dividend Aristocrat and only one of 7 European stocks meeting this requirement. The dividend will increase from €3.55 to €3.85 (+8.5%) when approved at the shareholders’ meeting to be held on April 18th, 2019. When approved the dividend gets paid out in May at once.
Since 1998 the dividend grew from €0.28 to €3.85. The 5-year dividend growth rate is now 9.0% and the present dividend yield is 1.73%. This is below the 2.61% sector average and also below the 10-years dividend average of 1.90%.
The dividend payout ratio increased from approximately 30% around 2000 to 55% based on the 2019 to be approved dividend. The dividends paid are covered by earnings (1.8x coverage), but the current payout ratio leaves little room for dividend growth. The earnings per share of €7.08 (FY2018), represents an increase of +6.5%. Maintaining the payout ratio and earnings per share growth at the same levels will result in a maximum dividend growth of a similar percentage.
Two noticeable aspects
Investors should pay attention to the shareholder structure of L’Oreal and the loyalty bonus when considering investing in this dividend stock. There are three major shareholders, the family Bettencourt with ~33%, International institutional investors with ~29% and Nestlé with ~23%. Meaning that 85% of the stocks are with this “special” group, probably investing for the long run. The official free float is around 40%, but in practice on ~5% is held by individual shareholders, making L’Oreal less of a short-selling candidate.
Source: L’Oreal annual results 2018
Next to the shareholder structure, another non-standard aspect is the loyalty bonus scheme. L’Oreal is rewarding investors with an additional 10% dividend bonus under certain conditions. When investors register their share, they will receive a loyalty bonus of +10%. For example, this preferential dividend is €3.90 instead of €3.55 for 2018. Registered shareholders will be entitled to receive the +10% loyalty bonus in subsequent years if you hold your shares continuously for two full calendar years. This will typically leads to longer holding-periods for the L’Oreal share.
Both the shareholder structure and loyalty bonus scheme are a strong foundation under the high valuation.
Conclusion
L’Oreal is a market leader and a wide economic moat, a high-quality business and well positioned in the beauty products market. Given the strong competitive advantages and continues growth in R&D budget, the company has been able to generate stronger cash flows even during recessions, which also resulted in 38th consecutive years of dividend increases. Making L’Oreal one of the few true European Dividend Aristocrats.
Looking forward, the worldwide beauty market has strong underlying trends and will grow at a rate of ~5%. L’Oreal strategy “Catch the growth wherever it emerges”, should help them to significantly outperform the beauty market. There is sufficient growth to grasp in the new growth markets and L’Oreal’s management is acting on the digital transformation trend.
The shareholder structure and loyalty bonus scheme are stabilizing factors for the share price, but also causing also a high valuation and a somewhat lower dividend yield for the investor.
L’Oreal’s is certainly “Worth It”.
Since the stock is on record high levels, my recommendation for long-term dividend growth investor would be “Buy the Dips”
Other Sources of Dividend Investment Ideas
The Dividend Aristocrats list is not the only way to quickly screen for businesses that regularly pay rising dividends.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of less than 20 businesses with 50+ years of consecutive dividend increases.
- The MoneyInvestExpert Defensive Aristocrats is a performance-based top-10 selection of the Dividend Aristocrats to outperform the market on the long-term.
- Portfolio lists like the Berkshire Hathaway Portfolio or Bill Gates’stock portfolio can be a source.
- For the European focused investors there is also the list of European Dividend Aristocrats.
- Dividend Champions are not necessarily members of the S&P 500 index, have increased their dividend for 25 or more consecutive years.
- 100+ years of dividend, the list of stocks that pay over 100 year of dividend can be an list of inspiration.
Next to selecting the right dividend stocks, important principles for successful long-term investing are Disciple, Diversification, Defensive & indeed Dividend. Read more about this in our free e-book.
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