5 German Dividend Growth Stocks (Part I)

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Includes: FLMNF, FSNUF, FUPEF, SAP, SBMAF
by: Torsten Tiedt
Summary

German companies don’t care that much about years of dividend increase.

But years of dividend increase is not a synonym of dividend stability.

Stable dividend growth stocks in Germany exist.

I show you five of them.

The lack of dividend increase in Germany

Safety first. This motto is wide spread in Germany, and it holds true for dividend payments, too. You can feel the pain of SAP’s (OTCPK:SAPGF) management confessing that the pay-out-ratio increased once again:

Source: SAP annual report 2009

Here is what “another slight increase” of the pay-out-ratio looked like back in 2009 leading to a flat dividend:

Source: Stock screener dividendstocks.cash

A flawless history of dividend increase sacrificed for the sake of the pay-out-ratio. This raises the question if companies like SAP can still be considered dividend growth stocks? Literally speaking, dividend growth means growing dividends over time. This growth needs to be reliable/stable and preferably high/dynamic. Both can be achieved even if dividends remained flat for a year or two.

Comparing SAP with some of the most long-serving dividend aristocrats reveals, that both stability and dynamic of SAPs dividend growth is competitive. Although the current dividend yield of 1.46% is modest (on pair with Parker-Hannifin (NYSE:PH)), dividend growth (CAGR 10 years and CAGR 5 years) and stability (dividend stability) are among the best.

Source: Stock screener dividendstocks.cash

I can read you mind: “how can a stock not increasing its dividends for two years claim a higher dividend stability than any other stock increasing its dividend on yearly basis?”

Stability is more than “just” increase. It’s an increase in equal steps. Looking at American States Water, we see two different phases of dividend growth. A phase of slow growth until 2010 succeeded by a phase of fast dividend growth. Accelerating dividend growth is not a bad sign, but it leads to a decline in stability. You could ask your-self, when the company enters phase 3 and how it looks like.

Source: Stock screener dividendstocks.cash

Don’t get me wrong. All stocks shown in the list shine at extraordinary high levels of dividend stability. I only try to make the point about the difference between increase and stability.

Dividend rhythm in Germany

As you know, most companies in the US pay dividends four times a year. In Germany, it’s common to get a single dividend payment around late spring. In the dividend calendar below, you find the ex-date (the bell) and payment date (the dollar sign) for the stocks analysed in this article and some other very popular German companies.

Source: Dividend calendar dividendstocks.cash

Valuation of German and U.S. market

Looking at the valuation of the markets from the highest level, the U.S. stock market is priced more ambitiously than the German market. On the other hand, the PE-ratio in the U.S. is much lower than the respective CAPE-ratio, indicating a superior growth dynamic in the U.S. At least, that’s my interpretation.

Source: Starcapital – Global overview of fundamental valuation ratios as of 31.01.2018

Definition of dividend growth stocks

Before analysing promising growth stock, here comes my definition of what this means:

  • Stable earnings growth in the last 20 years (correlation at least 0.8 out of 1.0).
  • Yearly earnings growth in the last 5 years of at least 5 percent on average.
  • Stable dividend growth in the past (correlation at least 0.9 out of 1.0).
  • Yearly dividend growth in the last 5 years of at least 5 percent on average.
  • No decreasing dividends for at least 10 years.
  • Positive outlook for the earnings of the next business year.

Furthermore, I prefer global players not dependent on a single local market. Apart from diversification, successfully conquering new markets is a proof of competitiveness.

As explained in 5 British Dividend Growth Stocks the pay-out-ratio is not part of my criteria-set, but in the table below I show it anyway.

Five German dividend growth stocks

The following stocks meet most criteria:

Source: Stock screener dividendstocks.cash

Most criteria, because SAP has only seven years of dividend increase. I use the criteria set as guidance with exceptions confirming the rule. Another point of interest: the current dividend yield of most stocks is not something an income investor close to retirement may desire. On the other hand, earnings and dividend stability of these stocks reach levels many dividend aristocrats can only dream about, translating into reliable growing dividends in the coming years.

SAP

What they do

In the world of internet of things, when your toaster talks with your dishwasher about the latest blackout, chances are high they know the facts thanks to a cloud. Maybe a cloud from SAP (OTCPK:SAPGF) as SAP is leader by number of business storing their data there. The mission of SAP is to help companies to cope with complexity resulting in more and more complex business processes producing more and more data. Cloud, business intelligence, augmented humanity. Everything in the pursuit of one single objective: turning the customer of SAP into an “intelligent company”.

As global leader in ERP-software (enterprise resource planning), SAP reports that more than 76% of all transactions worldwide touch at least on of their systems. They have more than 378.000 (business-)customers in more than 180 countries (Source: SAP integrated report 2017).

SAP’s revenue for 2017 was 23.461 billion EUR and its net income was 4.017 billion EUR.

Earnings and dividends history

We see a sound earnings growth accompanied by growing operating cash-flows. Small setback: the earnings growth of the last five years didn’t exceed 4% which is not impressive. But according to plans, net income growth will accelerate, and analysts seem to believe by estimating an increase of EPS from 3.36 EUR to-date to 4.71 Euro in 2020 representing a CAGR of 12%. During the same time, dividends are believed to increase from 1.25 EUR to 1.7 EUR. If this comes true, pay-out-ratio will slightly decline to about 36 percent, which is crucial for the well-being of SAP’s management, as we have seen above.

Source: Stock screener dividendstocks.cash

Current situation and valuation

SAP did not participate from the current bull market as much as you might expect, which can be explained by the rather low earnings growth in the latest years. This makes the stock not nearly as expensive as its main cloud competitors, namely Microsoft and Amazon. Relevant fair values range from 74 to 82 EUR compared to a current stock price of 86 EUR (it was already as high as 100 EUR). It is predicted, that at the end of the current business year, fair values catch up with the current price.

Source: Stock screener dividendstocks.cash

Dividend yield

The current dividend yield is about 1.5%. This is close to the average of the latest years, but at the top of the last 12 months. Maybe more interesting is the expected dividend yield of about 2% three years from now in 2020.

Source: Stock screener dividendstocks.cash

Fielmann

What they do

In Germany, no one will ask you this question, because anyone knows. Fielmann (OTCPK:FLMNF) designs, produces and sells about half of all glasses in Germany in its own stores. Root of their success is service orientation, translating into a mixture of low-price but high quality including generosity regarding customer satisfaction.

If Fielmann opens a new store in Germany, its market share by volume sold is close to 50% right from the start. Its brand is that strong, that missing globalization is excusable. Besides the company also operates in Austria, Switzerland, northern Italy and Poland. Except from opening new stores, Fielmann grows by enlarging and renovating existing stores or moving them to better locations (source: Annual report 2016 page 56).

Fielmann’s revenue for 2017 was 1.395 billion EUR and its net income was 182 million EUR.

Earnings and dividends history

Compared to SAP, Fielmann is much smaller, but is paying dividends rather aggressive without overextending it-self. Dividend CAGR for the last 5 years is 5.7%, in-line with its earnings CAGR of 5.9% for the last five years. Both stability of dividends and earnings are rock-solid with 0.98 each.

In contrast to SAP, Fielmann increased its dividends during the financial crisis from 0.98 EUR to 1.00 EUR, resulting in 12 years of dividend increase.

Source: Stock screener dividendstocks.cash

Fielmann as a leader in price-performance manages to achieve stable operating margins between 17% and 19% during the last fifteen years. Growth is primarily driven by increasing revenues. Given the company’s strong brand and its operating business, the stocks seems to be a safe harbor.

Source: Stock screener dividendstocks.cash

Current situation and valuation

Fielmann’s stock price is close to its one-year low. But still fair values are about 58 EUR compared to 69 EUR current stock price. Anyway, it is predicted that until end of 2019 the fair values should meet the current stock price.

Source: Stock screener dividendstocks.cash

Dividend yield

In times of economic crisis, Fielmann’s current dividend yield topped 4%. Today, 2.6% must be enough. But thanks to the company’s increasing revenues and aggressive dividend policy, the yield shall exceed 3.3% in 2020. Given the low risk (beta of 0.46), it’s not the worst deal you can enter.

Source: Stock screener dividendstocks.cash

Stay tuned…

In part II. I will cover the remaining three stocks, amongst other the only German dividend aristocrat.

Disclosure: I am/we are long SAP, FLMNF, FSNUF, EMR. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.