- Inspiration can come from unexpected places. A wise investor will step back from an unexpected input to carefully consider the fundamentals, personal goals, and a personal investing rule-set.
- In the US, Electrolux is usually associated with vacuum cleaners, but the company is an international behemoth in home appliances.
- Be careful. American investors have several choices in ticker symbols for Electrolux, and which symbol you pick does make a difference.
- I think this is a good company, I like some of their products, I like their prospects, I like their strategy, and I think the price presents an opportunity.
- I have not yet pulled the trigger, but I have added ELUXY to my watch list.
Sometimes an idea hits you when you least expect it. My decision to investigate a possible investment in Electrolux (OTCPK:ELUXY) came to me because one of our refrigerators died. It was a Frigidaire purchased in 1979 by my wife's parents. It predated our marriage, it predated our first meeting, and it even predated my junior year in college. The big old Frigidaire gave thirty-five years of trouble-free service, but the relationship was now over. This tells you a couple of things. First, Frigidaire made a very good product in 1979. Second, the kitchen in that old house really looks like it was last remodeled in the 1970s. But I digress. It was time for a new fridge.
Now we were standing in the nearest big box appliance retailer looking for a replacement. Our choice was made more difficult by having to fit into the existing kitchen space, and by the proliferation of new choices in brands and styles. There were the old standard top freezers, bottom freezers, side by side models, and the new French door types. There was LG and Samsung (OTC:SSNLF), along with GE (NYSE:GE) and Maytag and Whirlpool (NYSE:WHR) and others, and then there was good old Frigidaire. But I know better than to jump to conclusions; the engineer and smart consumer in me asks a lot of questions. Frigidaire may no longer be the Frigidaire we know and love. One question I always ask the department manager when I consider a major appliance purchase is, "Which of these brands gets returned to you most often?" Believe it or not, most managers will quietly and honestly answer this question when asked. To our dismay, his answer was that they get a lot of Frigidaire returns, but his answer came with a caveat. I love caveats. In this case, the reason so many Frigidaire appliances are returned is because of their dishwashers. Everything else is okay.
I find that interesting. One of my rules for investing is to look for companies that are unfairly maligned. The market will eventually figure out the true value of a company and set a fair price on that value. In the long term the market is efficient, but in the short term the market is often very inefficient. If the product return situation on Frigidaire was an indicator, they could have a bad reputation that will turn around to eventually reward the true quality of the rest of their line of appliances. In addition, maybe they will use some of their appliance engineering know-how from other areas to put a concentrated effort into fixing the problems with the dishwashers. I thought to myself, "Maybe the company behind Frigidaire is in the same situation, unfairly maligned but fundamentally strong." So I decided to do some research and find the "who," "what," and "where" along with the fundamentals of the company behind Frigidaire appliances.
Frigidaire is a storied iconic American brand, but in my research I found that it is no longer all red, white, and blue. Frigidaire was founded about 100 years ago as the Guardian Frigerator Company in Fort Wayne, Indiana. In 1916 they introduced the world's first self-contained refrigerator. In 1918, William C. Durant, one of the founders of General Motors, became an investor and the company soon adopted the name Frigidaire. From 1919 to 1979, the company was owned by GM (NYSE:GM). They made home appliances and air conditioners, and they also made the powerful GM automotive air conditioners I remember from my childhood. My reliable old fridge was probably made under GM ownership, but I am not certain of that fact because our fridge was purchased in 1979, the same year White Consolidated Industries bought Frigidaire from GM. White was in turn bought out by Electrolux in 1986, so Frigidaire and White-Westinghouse became brands in the Electrolux appliance stable where they remain today. Now I had the picture; I needed to investigate Electrolux.
Most people with whom I have discussed this article think of Electrolux as a vacuum cleaner company, but Electrolux AB may be the world's second largest appliance manufacturer after Whirlpool. Surprised? So was I, but this is a big company. The company is based in Stockholm, Sweden, and dates back to 1919, though the origins are somewhat earlier. Through a strong appetite for mergers and acquisitions, Electrolux group has grown to sell more than 50 million units to customers in 150 markets every year. They have eight major brands covering markets from ultra-luxury to premium to mass market. These brands include Grand Cuisine, Electrolux, AEG, Zanussi, Eureka, Frigidaire, Molteni, and Westinghouse. Though Electrolux Group is based in Sweden, Sweden accounts for only 3% of sales. All of Europe is only 30% of sales, down from 50% five years ago. More than half of worldwide sales now come from the Americas. Kitchen appliances are 66% of worldwide sales, so you would expect that maybe their business would be in tune with the housing and remodeling markets. In general, an improving economy should be good for such a company.
Since I am a dividend growth, dividend income kind of guy, I wanted to study share and dividend history. The Electrolux corporate web site has a stated goal regarding dividends: "The Group's goal is for the dividend to correspond to at least 30% of income for the period, excluding items affecting comparability." They go on to claim that the historical dividend has been much higher than 30% and that Electrolux has a "long tradition of high total distribution to shareholders that includes repurchases and redemptions of shares." You would expect that as income improves, dividends will go up. That sounds really great, but what are the actual numbers they would pay me? Well, here it gets a little complex. First, we need to understand the Electrolux share structure.
Electrolux is listed on the NASDAQ OMX exchange in Stockholm and is divided into A-shares and B-shares. A-shares get one vote, while B-shares get one tenth of a vote. Owners of A-shares have the right to convert to B-shares, but the reverse is not true. The total number of shares is almost 309 million, of which a little more than 8 million are A-shares. All shares are equal in proportion of equity in the company, in claims on earnings, and in dividends, and in fact the price of A and B shares track closely, though A-shares may command a slight premium. The purported reason you would want to convert your A-shares to B-shares is for improved liquidity since the A-shares are very thinly traded. It appears to me the company is trying to gradually retire the A-shares in favor of B-shares.
All of that is interesting, but most likely I would be buying a security on an American exchange, not a Swedish exchange. Here in the US, Electrolux trades over the counter as either ELUXF or ELUXY. For me, ELUXY is the logical choice. ELUXY is the normal, authorized American Depositary Receipt (ADR) administered by Citi and authorized by Electrolux and is based on the B-shares. ELUXF is an over the counter version of the ordinary B-shares for which certain brokers have made a market. There are two big reasons I would prefer to buy ELUXY. First of all, the authorized ADR is more widely traded and has more stable pricing. If you check pricing, you will see that ELUXY and ELUXF track each other long term, but in the short term they can diverge greatly. In fact, average daily trading volume on ELUXY is low at only a few thousand shares, so it is not the most liquid security you could own. A big day for ELUXY is 5000 shares traded. A low day is maybe 200. If liquidity is important to you, you should carefully consider this fact. The ELUXF shares are much worse with an average daily volume too low to measure. On most days there is zero ELUXF volume. By comparison, the Electrolux B-shares trading in Stockholm have an average daily volume in the 700,000 share range.
The second advantage with the authorized ADR is that Citi converts your dividend and pays you in dollars. The investor relations department at Electrolux tells me that if you own ELUXF, you get paid in Swedish Krona (SEK), not in dollars. That could be inconvenient and carries currency conversion risks and costs.
Electrolux pays a dividend only once a year. The payment date is in mid-April and the ex-date is near the end of March. The most recent dividend was 1.662744 per ADR, which at the August 1 closing price would give a current yield of 3.3%. That is not too bad. The forward P/E ratio is listed between 11.79 and 14.66 depending on whose estimates you use, but the most recent historical P/E is over 1600 because earnings were affected by significant one-time costs, the economic difficulties in Europe, and particularly Latin America, which is a significant market for Electrolux. Electrolux does not have a history of raising their dividend, but they do have a history of rewarding shareholders according to their stated dividend policy. If you want a recent history of dividends and other distributions to shareholders, check out the IR web site here. I found the Electrolux Investor Relations people to be very responsive and very helpful in every question I asked while researching this article.
Electrolux is not only acquisitive; they also know when to divest and move back to their strength. You will note at the link above the spin-off of Husqvarna as a separate company in 2006. Electrolux shareholders got one share of Husqvarna for every share of Electrolux, either A or B as the case may have been. (If you are interested, Husqvarna trades as HSQVY in the US.)
The board of directors of Electrolux appears to be true to their word as far as being a shareholder-friendly company. In January 2007, the board conducted a mandatory redemption of shares at a premium price to take some excess cash off their balance sheet. I think that if a board does not see a good opportunity to invest a mountain of cash, giving it to the shareholders is the right thing to do. Many companies might have a special dividend, or a share buyback program, but I think buying back shares at a premium price was a very shareholder friendly way to do it. This amounted to an "extra" dividend of $5.6333 per ADR for American shareholders. This was in addition to the regular April 2007 dividend of $0.96006 per ADR.
Of course, not all has been peaches and cream. In 2008, the board decided not to pay a dividend due to the bleak economic conditions and lack of sufficient income. Maybe keeping a little more of that balance sheet cash would have helped smooth out the dividend ride, but hindsight is 20/20. What does impress me, however, is a board of directors that seems to have shareholder interests at the forefront of decision making, yet always remembers that they have a responsibility to keep the company healthy. That is a board of directors trying to guarantee the future of their company.
By the way, if you check the NASDAQ web site for dividend history, you will see that they reported the dividend was not paid in 2009. That is because the board always pays the dividend for the previous year in April of the following year; the 2007 dividend was paid in April 2008, 2009 was paid in 2010, etc.
Overall, I think this is a good company, I like some of their products, I like their prospects, I like their strategy, I like the board of directors, and I think the price presents an opportunity at this level. I believe things are looking up for Electrolux. I have not pulled the trigger on buying ELUXY yet, but I have added it to my watch list. If you want some exposure to a European company, with a European shareholder view and worldwide market exposure, holding a blue chip stable of brand names, standing to benefit from a general worldwide economic recovery, maybe you should add Electrolux to your watch list as well.
As always, do your own due diligence before investing your hard earned cash.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.
Additional disclosure: The author is not a certified financial expert of any kind. Please do your own diligence before investing. This essay serves as a journal of the author's own investing research.