H&M: Buy This Fast Clothing Retailer For Its 4% Yield

| About: Hennes & (HNNMY)
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Hennes & Mauritz (OTCPK:HNNMY), usually referred to as H&M, is an apparel retailer based in Sweden. The company was founded in 1947 and is currently the world's largest fast clothing retailer in terms of sales, followed by Spain's Inditex (OTCPK:IDEXY) and Gap (NYSE:GPS). The H&M Group is composed of six brands with a presence in 48 countries, and employs more than 100,000 people. It has more than 2,900 stores spread around the world. H&M does not own any factories; instead its production is outsourced to approximately 800 factories across Europe, Asia, and the Middle East. Its market capitalization is above $50 billion, and is traded in the U.S. in the over-the-counter market.

H&M's long-term growth history is very good. Over the past decade, the company increased its sales, on average, by 10.2% every year. In 2012, H&M maintained its growth path given that sales were about $18 billion, an increase of 10% from the previous year, which is very close to its long-term history. The company's profitability is very high, achieving an operating profit of $3.3 billion in the past year, or a 18% operating profit margin. This strong profitability is also reflected in the return-on-equity ratio of 38%, which is also impressive.

Geographically, the company is very well-diversified, although it is still considerably exposed to Europe. By country, Germany is H&M's biggest market, accounting for 21% of sales. Scandinavia represents around 16% of sales. Given that these regions (Scandinavia and Germany) enjoy the strongest economic background in Europe, H&M's sales and earnings should do relatively well despite Europe's economic crisis. The company's exposure to Asia is not big (5% of sales), but should considerably increase over the next few years due to new store openings. In 2013, Asia should account for 20% of all new store openings. The U.S. represents around 8% of sales.

The company maintains its long-term goals of increasing the number of stores annually by 10% to 15%, while at the same time increasing sales on comparable units. In 2013, H&M expects to open around 350 new stores and to enter into new four countries. Even though Europe has the highest concentration of stores nowadays, the regions with the highest growth rates of new stores are Asia, the U.S., and Eastern Europe. Moreover, the company has a small presence in Latin America and Africa, so there is a lot of room to grow over the long term. Additionally, H&M will launch online sales in the U.S., the world's largest online market, in the coming months, which should also give a boost to the company's top-line growth.

Regarding its dividend, H&M had a good long-term growth history until 2010. The last dividend per share was 9.50SEK ($1.42), which at the current stock price represents a very attractive dividend yield of 4%. This is the highest within its sector given that Abercrombie & Fitch (NYSE:ANF), Gap, and Fast Retailing (OTCPK:FRCOY) all have yields below 1.5%, and Inditex only yields 1.9%. However, for the last two years it did not increase its dividend due to a significant rise in its payout ratio. The last dividend paid represented a payout of 93%, which is clearly above the company's goal to pay around 50% of earnings each year to shareholders. Nevertheless, H&M has paid consistently much more than 50% of its earnings to shareholders, and this policy should continue over the next few years. This is reflected in analysts' consensus, who expect the dividend per share increase to 10SEK ($1.50) in 2014 and 11SEK ($1.65) in 2015.

H&M has a very strong balance sheet with more cash than debt. This gives the company financial flexibility to allocate capital between its expansion project and shareholder returns. This position also enables the company to grow its dividend over the next few years, due to its high profitability, growth prospects, and strong financial position.

H&M is a growth company and will continue to be for the foreseeable future, justifying its high valuation multiples compared to the broader market and some of its peers. The company is trading at 22x its estimated 2013 earnings, which is not cheap but justifiable by the company's strong growth. For instance, Gap trades at 16.4x its forward earnings, but offers a much lower dividend yield of only 1.3%.


H&M offers a very compelling dividend yield that is supported by the company's strong growth outlook, good cash flow generation, and solid balance sheet. Moreover, given current economic constrains worldwide, H&M is protected against downturns by offering appealing and affordable clothing. That enables it to capture greater market share as shoppers seek alternatives to luxury fashion brands.

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.