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Summary

  • Siemens presented recently its long-term strategy “Vision 2020," focusing the company toward growth areas of electrification, automation and digitization.
  • It offers a 3% dividend yield with good growth prospects over the long-term, supported by its good cash flow generation and strong balance sheet.
  • Siemens is currently attractive trading at close to 15x forward earnings and has started its $5.5 billion share buyback program this week.

A few months ago, I suggested Siemens (SI) as a good income investment. Although its dividend yield isn't among the highest in the stock market, it is safe and together with its $5.5 billion share buyback program makes Siemens quite attractive for income investors. The company recently released its new long-term strategy called "Vision 2020" with the goal of simplifying the organization and raise productivity.

Siemens is a global powerhouse in electrical engineering and electronics. The company has more than 350,000 employees across the world, working to develop and manufacture products, design and install complex systems and projects, and tailor a wide range of services for individual requirements. The company is one of the world's largest providers of environmental technologies. Around 43% of its total revenue stems from green products and solutions. Siemens has also some financial assets through its financial division Siemens Financial Services. Siemens is the world's largest automation company being therefore the worldwide leading supplier of productivity, flexibility and efficiency offerings for industrial enterprises.

Vision 2020

Currently, Siemens' asset portfolio is organized into four main operating businesses, namely Healthcare, Infrastructures, Energy and Industry, under 16 different divisions. Under its new business profile, Siemens is eliminating the sector level and organizing the business into nine divisions, instead of the previous 16. Healthcare will be managed separately, which could fuel some speculation about an eventual spin/exit in the coming years. Its Audiology unit will be spun off and listed in the stock market.

Its new long-term strategy aims to focus the company along the fields of electrification, automation and digitization. The company is orientating its resources toward these growth fields in the future. The company sees 2-3% long-term growth in its traditional electrification business, 4-6% growth in automation and 7-9% growth in digitization. Siemens also wants to improve its corporate governance across divisional functions to reduce complexity, aiming for sustainable cost reductions. By the end of fiscal year 2016, it expects to achieve cost reductions amounting to about €1 billion ($1.37 billion).

To achieve these goals, Siemens wants to enhance employee participation, with up to €400 million ($550 million) annually made available depending on company performance. This is about 3 x higher than today, aiming at supporting a sustainable "ownership culture" at the company and aligning its own goals with employees' interests. Siemens wants to increase share ownership by at least 50% to over 200,000 employees. Currently, employees own about 3% of the shares outstanding.

Regarding its financial goals, Siemens wants to maintain a strong balance sheet, targeting a industrial debt to EBITDA ratio below 1x, in the medium-term. Its dividend payout ratio should be between 40% to 60% of earnings after taxes, without taking into account the impact of share buybacks.

Siemens' Shares

Siemens' market capitalization is about $115 billion and its shares are currently listed on the New York Stock Exchange as American Depositary Receipts (ADR). However, Siemens has recently announced that it will delist from the NYSE. According to the company, the goal of the planned delisting is:

"...the planned delisting and planned deregistration is to address the change in the behavior of investors. The trading of Siemens shares is nowadays conducted predominantly in Germany and via electronic trading platforms or over-the-counter. Trading volume of Siemens shares in the US is low, amounting to significantly less than 5% of its global trading volume in the year 2013. As a consequence processes of financial reporting are simplified and efficiency is improved."

Holders of ADRs can still trade and sell their shares in the over-the-counter market. ADR holders will continue to receive their dividends in U.S. dollars. Siemens expects to delist on May 15, 2014.

Regarding its dividend, Siemens has a good history given that it was raised several times since at least 1995. Its last dividend paid was €3 ($4.10) per share related to Fiscal Year 2013, unchanged from the previous year. At its current share price, it offers a dividend yield of 3%. For FY 2014, Siemens expects basic earnings-per-share growth of at least 15% to more than $8 per share. Assuming a dividend payout ratio of 60%, unchanged from FY 2013, its dividend per share may rise by 17% to €3.50 ($4.81) per share without any impact from the $5.5 billion share buyback initiated this week.

Siemens has a very good cash flow generation capacity and a solid balance sheet, making its dividend quite conservative and has therefore very good growth prospects over the long-term. Its shares are trading at less than 15x its estimated FY 2014 earnings, which is attractive for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Siemens: Long-Term Strategy Supports A Growing Dividend