5 German Dividend Growth Stocks (Part II)

|
Includes: FSNUY, FUPBY, SBMDY
by: Torsten Tiedt
Summary

Finding German dividend growth stocks using traditional criteria is a pain.

Years of dividend increases is not a universal indicator for dividend growth.

The conjunction of stability (correlation) and growth (CAGR) is.

I owe you three more German dividend growth stocks. Here they are.

Recap: 3 takeaways of universal importance

In part I of “5 German Dividend Growth Stocks,“ I gave a short introduction into the German stock market including differences regarding dividend policy.

First takeaway: Finding German dividend growth stocks is pain, but it's possible if we reconsider the plausibility of our criteria for the German stock market. Using common U.S. criteria is pain, because continuous dividend increase is of lesser importance in Germany than in the U.S. Therefore, “years of dividend increase” acts as a killer criterion. Although I cover 107 of the most popular German stocks, of which all but five pay dividends, I only found 4 (in letters: four) stocks matching all criteria. As a reminder, here they are:

  • 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. <= Killer criterion!!!
  • Positive outlook for the earnings of the next business year.

Because I needed 5 stocks (the title was already written), I added SAP (NYSE:SAP) to the list. 7 years of consecutive dividend increases at least.

Second takeaway: Consecutive dividend increases is a not only a killer criterion, but also a weak one to measure the quality of dividend growth in Germany. In the U.S., a missing dividend increase is considered a fail. In Germany, it’s not. My database contains 85 dividend aristocrats from the U.S. Its average payout ratio based on earnings of the last 12 trailing months is 54.3%. Based on free cash flow, the payout ratio rises to 78.2% (an alarming number - Trump’s Tax Cuts and Jobs Act to the rescue!). When SAP decided not to increase its dividends in 2009 and 2010, its payout ratio on earnings was about 35%, based on free cash flow even less.

Third takeaway: the conjunction of high stability (correlation) and growth (OTCPK:CAGR) is a superior indicator to quantify the quality of growth, because this combination can be applied anywhere (regardless of the local dividend culture), and it can be applied to earnings and cash flows, too. Remember that dividends are based on earnings/cash flows. In the long run, they cannot exist on their own. Fixation on dividend aristocrats may blur this fact. If you’re not sure why stability is more than just increase, please have a look at part I.

Having said this, let’s look at three rare German companies matching all criteria – even 10 years of consecutive dividend increase. My objective is to give you a solid first impression about every stock, including outlook and current valuation.

Fresenius

What they do

Fresenius (OTCQX:FSNUY) is a health company split into four divisions. The largest division responsible for nearly half the revenue is Fresenius Medical Care, itself a publicly traded company of which Fresenius holds about 30 percent. The health conglomerate offers products and services for dialysis, hospitals, and outpatient treatment. Fresenius SE employs over 270,000 people in more than 100 countries.

Revenue of Fresenius in the last twelve trailing months was 32.6 billion € and its net income was 1.778 billion €.

Earnings and dividends history

Having increased its dividend exactly 25 times in a row, Fresenius is the only German dividend aristocrat alive:

Source: Stock screener dividendstocks.cash

The CAGR of that last 5 years is close to 11%, in line with its earnings growth of nearly 11.5%. A current payout ratio of less than 20% and a positive earnings outlook mean that dividends continue to grow. Earnings stability took a small beat from 2005 to 2008, but an overall score of 0.86 is still excellent.

Current situation and valuation

According to the latest figures released on February 27, in 2017 sales increased by 15% and adjusted earnings by about 19% (source: Full year 2017 result). Both management and analyst remain confident about future growth. Management expects group sales to increase by 5% to 8% and net income even more by 6% to 9%. Analysts agree by estimating EPS up from 3.21 € to 3.94 € in 2020 translating into an CAGR of 9%.

After a recent price drop from close to 80 € to about 65 €, Fresenius overvaluation is nearly gone. Relevant fair values range from 52 € to 60 €. Already at the end of the current business year, fair values pull ahead. One reason for the declining stock price is the disputed takeover of Akorn (AKRX) and the latest accusations regarding false statements. A possible cancellation of the take-over may boost Fresenius stock price in the near term. A second reason is seen in the uncertainty of the future development of the US health policy (source: 3rd quarter report 2017 page 5).

Source: Stock screener dividendstocks.cash

Dividend yield

Despite the recent price drop, the dividend yield is only close to 1% and it will be even lower after the stock price raised again. Shareholders locking in right now can expect their personal dividend yield to increase to 1.3% until 2019. A second option is to wait for another financial crisis. Back in 2009, the dividend yield was up to 2.5%. You decide.

Source: Stock screener dividendstocks.cash

Stratec Biomedical

What they do

Stratec’s (OTC:SBMDY) customers are laboratories in need of

  • complex instruments. The hardware to run the tests.
  • consumables. Smaller parts being consumed during a test run.
  • software to manage all processes, e.g. to analyse the results of test runs.

Stratec was founded in 1979 and since then covered more and more of the upstream value chain of laboratories. By outsourcing necessary prerequisites to Stratec, labs can focus on their core competence instead of designing and assembling own instruments, consumables and writing software to manage all this. Its no surprise, that due to increased complexity and concurrency, labs continue to outsource more and more parts of their upstream value chain (source: Stratec 17th German corporate conference page 10).

With 1,075 employees on September 30, 2017 (source: 9-month-report 2017 page 5) the company is small compared the behemoths we are used to reading about. But Stratec operates highly successfully in its niche market, constantly growing revenues and earnings since the company is listed.

Source: Stock screener dividendstocks.cash

Among Stratec’s customers are Roche (OTCQX:RHHBY), Danaher (DHR), Siemens (OTCPK:SIEGY), Abbott (ABT), ThermoFisher (TMO) and other companies we know (source: Stratec 17th German corporate conference page 12).

Revenue in the last twelve trailing months was 209.6 million € and its net income was 27.5 million €. Isn't this sweet?

Earnings and dividends history

Stratec increased dividends in the last 13 years with a CAGR of nearly 12% in the last 5 years. During the same time, dividends CAGR was 6.6% “only.” As a result, the pay-out-ratio declined from around 50% in 2012 to about 40% today. Safety-first applies to Stratec’s dividend policy, too. Earnings stability is 0.97 (out of 1.0), increasing Stratec’s company value constantly as years pass by.

Source: Stock screener dividendstocks.cash

Current situation and valuation

Earnings in 2019 are expected at 2.67 EPS translating into a CAGR of a whopping 17.6% compared to 2016. This is above historic CAGR and well above what management expects, talking about average annual organic sales growth in the high single-digit or low double-digit percentage range and a broadly consistent net margin (source: Stratec 17th German corporate conference page 17). Considering historic CAGR is close to what management predicts, I expect an earnings CAGR of 10% coupled with a dividend increase slightly lower.

Source: Stock screener dividendstocks.cash

Based on estimates of 2017 (results not yet available), fair values range from 50 € to 76 € compared to current stock price of 71.5 €. Because of high volatility of the operating cash flow, I’d stick with the fair values based on earnings and dividends being close to each other at 50 €, making Stratec a pricey stock right now. Based on very optimistic analyst estimates, fair values are expected to meet current price in 2019. Add one year, just to be safe.

Dividend yield

Source: Stock screener dividendstocks.cash

The current dividend yield is 1.1%. Not that much. But we’re talking about reliable dividend growth, not high-yield. The dividend is close to its historic 10 year low but expected to increase to 1.6% until 2019. High yield and stable growth rarely wander on the same path.

Fuchs

What they do

Fuchs (OTCPK:FUPBY) is world leader in lubricants. The company serves more than 100.000 customers with for very different segments like automotive suppliers, OEM, mining and exploration, metalworking, agriculture and many other in more than 40 countries, making Fuchs the world’s largest independent lubricant producer.

Revenue in the last twelve trailing months was 2.426 billion € and its net income was 266 million €.

Source: Stock screener dividendstocks.cash

Earnings and dividends history

Source: Stock screener dividendstocks.cash

Fuchs increases dividends since 12 years. Even more important: dividends and earnings grow in a very reliable way. Earnings stability is 0.99 (!) followed by a dividend stability of 0.95. CAGR 5 years of both earnings and dividends is close to 5%. Drawback: compared to a CAGR 10 years, both earnings (10%) and dividends growth (6.5%) slowed down.

Current situation and valuation

Earnings don’t grow in the same pace as revenues do, due to price increase of raw materials, strategic focus on large customers and a stagnating demand of lubricants by the world-economy (source: Annual report 2016 page 46).

Given the latest data available, relevant fair values range from 32.36 € to 37.24 € compared to a current stock price of 46.90 €. Fair values are expected to meet the current price around the end of 2019. In short: Fuchs seems to be heavily priced right now.

Dividend yield

Source: Stock screener dividendstocks.cash

Current dividend yield is 1.9%, close to historic low. Until end of 2020, dividend is expected to increase to 2.3%. During the financial crisis, dividend yield reached 3.8%. It may be a good idea to put Fuchs on your watch list and patiently wait for your chance.

Conclusion

That was hard. Contrary to Great Britain, finding just a handful of German dividend growth stocks using traditional criteria was impossible. We had to reconsider how to quantify dividend growth and relax the “killer criterion” of 10 years of consecutive dividend increase.

Furthermore, you may have noticed that the dividend yield of the stocks is rather low. The average of the 5 stocks presented is 1.6% with an average dividend CAGR 5 years of 7.6%. A dividend investor’s dream looks different, and this partly explains the high weight of US stocks in most German portfolios.

I hope you enjoyed some insights into the German stock market and thoughts about how to quantify dividend growth. Do you collect German dividends? Do you think the combination of stability and growth may help you finding dividend growth stocks in- and outside the U.S.? Please let me know.

Disclosure: I am/we are long FSNUF, SAP, FUPEF, DHR, RHHBF. 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.