Daimler: The Best Dividend And Return Play In The Global Automobile Sector
- Daimler's stock has performed poorly in 2017 being down 10% on the DAX.
- Fundamentally the company is very strong, and it is investing heavily in the future of automobiles while improving its profitability metrics.
- At the same time there is uncertainty regarding emission values.
- The company boasts a high dividend with a 40% payout ratio and is an attractive long-term value play in a cyclical sector.
Prior to the Q2/2017 results to be announced in mid-/end July I am reiterating my bullish opinion on Daimler (OTCPK:DDAIF) for both income and capital appreciation. The stock has been the worst performer of the German stock market (DAX) in 2017 being down 10% YTD in euro terms. Its USD-denominated ADR stock has been pretty much flat this year.
The company has seen a stellar 2016 and the most recent Q1/2017 results have been impressive as well. The market is currently overly cautious regarding Daimler's future, which I consider to present an attractive buying opportunity.
This article will only refer to the stock traded on the Frankfurt stock exchange and hence all values will be expressed in EUR (€).
What is going on at Daimler?
The stock has seen a dismal 2017 so far being down 10% YTD with the overall German market rising by more than 7%.
Source: Godmode-Trader; Daimler stock price (€)
The stock is also subsequently lagging the performance of other global car manufacturers as illustrated below:
What this shows is that apart from struggling Japanese car makers Toyota (NYSE:TM) and Honda (NYSE:HMC), Daimler stock is being outperformed by both its German competitors Volkswagen (OTCPK:VLKAF) and BMW (OTCPK:BMWYY) as well as US major car manufacturers General Motors (GM) and Ford Motor Company (F). Moreover, we can also clearly see that an investment in the stocks of the big automobile companies has not really netted any returns YTD.
With all the talk being about how Tesla (TSLA) is going to disrupt an entire industry, despite neither making any profits nor having comparable financial solidity, and its stock price reaching stratospheric heights, investors have dumped stocks of the established car manufactures on large scale.
Such a sharp sell-off always alerts me to do my due diligence on the stock in order to personally assess if this was warranted or if it indeed presents a discounted buying opportunity.
In the absence of the still upcoming Q2/2017 figures let's review the Q1/2017 results, today's release of US unit sales current concerns surrounding the stock.
Daimler reported record Q1/2017 earnings with an EBIT of €4bn compared to €2.1bn the year before. Despite benefiting from various special effects, most notably +€183m from a revaluing of the company's stake in Here, +€240m from updated fair value estimates of Daimler's stake in BAIC Motor and +€267m from disposing real estate at Mitsubishi Fuso Trucks and Bus Corporation, the business has been growing strongly and also topped analyst estimates. Across the board, return on sales metrics increased - from 7% to 9.8% for Mercedes-Benz Cars, from 6.3% to 8.4% for Trucks and +1.2% for Vans.
For May 2017 the company reported YoY growth of 13.5% in global car sales (China alone grew by more than 30%). For June 2017 Daimler just reported record sales in the United States which grew 1.8% vs. a year ago.
The company is only paying out around 40% of net earnings for its dividend so far and is currently boasting a dividend yield around 5%.
Despite these impressive financial results and its secure dividend, investors are punishing the stock as they are worried about the future.
Currently, we can identify two major uncertainties surrounding the stock:
1) Accusations of manipulating car emission values
In May the company shocked investors when news broke that German investigators have been extensively searching various sites of the company for evidence of manipulating emission values. Although so far no evidence has been found, this large-scale police raid is definitely concerning, and with the outcome being entirely unclear, despite the company cooperating with authorities, this uncertainty drags down the stock.
2) The end of the combustion engine
So while a manipulation of emission values may cost the company dearly (Volkswagen has already been fined for more than EUR 20 billion so far) and jeopardize its dividend it would not pose a going-concern risk.
This second major uncertainty, however, has much more disruptive potential. As a result the company is investing heavily into the future of the automobile in areas such as car connectivity and autonomous vehicles and has recently wholeheartedly acknowledged the danger Tesla presents. In an effort to combat this threat, Daimler is accelerating its $10 billion investment in electric vehicles, which aims at launching 10 new electric car models by the year 2022.
Source: Future Truck 2025: The first self-driving truck by Mercedes-Benz
Uncertainty regarding how the future of global car manufacturers may look like has pushed investors to dump stocks in the entire automobile sector apart from Tesla. Daimler has been hit particularly hard here and currently offers a compelling investment.
The company is only valued with a P/E of 7.1 (for reference Tesla basically has no comparable P/E given that it's only posting losses) and boasts a juicy dividend of above 5%. While Tesla's stock has been soaring and is pushed to new records almost daily, Daimler is to my mind the significantly safer play as it has both the financial firepower to invest into the future of the automobile and also ramp up production at will if demand grows stronger than expected. Prior to electric vehicles earning sizable market share, Daimler will benefit dearly from its current global leadership position in the premium car market, which allows to company to load up on its cash position.
I deeply feel that investors are currently overoptimistic and overconfident in what Tesla can achieve and notably underestimate the power of established leading global companies, such as Daimler, in terms of financial resources, human resources and production capabilities, to react to a changing market.
Daimler has been pioneering the automobile for more than 100 years, and I cannot picture a scenario that sees the company fading away.
Investors believing in this thesis do find an attractive entry opportunity in the stock right now and should also eye the upcoming Q2/2017 earnings closely.
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Analyst’s Disclosure: I am/we are long DDAIF, BMWYY, GM. 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.
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