Learnings From Daimler's Annual General Meeting

Summary

• Daimler hosted its annual shareholders' meeting today and will pay its 2017 dividend on April 10, 2018.
• Daimler as a company is terrific but Daimler as an investment has been a loss-making scheme.
• Various risks ranging from diesel ban to overly Chinese influence and massive future investments keep dragging down the stock price.
• Daimler itself is posting stellar results and boasts a great dividend.
• Investors can benefit from the upcoming ex-dividend date by locking in a 5.5% forward yield.

Daimler (OTCPK:DDAIF) held its 2017 annual general meeting today in Berlin, my home city, which is reason for me to reflect on my investment in the company and what it could mean for the future. Daimler's stock has been underperforming the market for quite some time, which has pushed the yield to almost record levels.

Source: daimler.com

A vast cocktail of news is pressuring the stock, ranging from the aftermath of the Dieselgate and the recently allowed ban of old diesel cars to the unprecedented 10% investment from Geely (OTCPK:GELYY) and over to the general challenges the company is facing as it transitions into a new era.

In this article, we will outline some key messages from today's meeting and how dividend investors can benefit from the upcoming ex-dividend date.

What is going on at Daimler?

Daimler's Management Board spent hours during its shareholders' meeting to discuss questions on diesel ban, competitive pressures, antitrust complaints, Daimler's organisational restructuring and future challenges as the company transitions into the era of electric cars. Against the background of such a one-sided discussion you may wonder that Daimler is struggling operationally, but in fact the opposite is the case.

Daimler posted record results for 2017, with group EBIT increasing by 14% to €14.7 billion and revenue rising by 7% to €164.3 billion. Net profit surged even more with a gain of 24% and easily topped the €10 billion barrier, coming in at €10.9 billion.

Investors are very afraid of potential litigation penalties connected to Dieselgate and antitrust complaints. Overall, this has resulted in a valuation of around 7 times earnings and a yield above 5%.

My three core learnings from that meeting today are as follows:

1. Investors are reserved regarding the recently disclosed Geely investment into Daimler. The fear is that with almost 10% of stock, the Chinese investor will not only act as a regular shareholder but in fact seek influence in tactical and strategic decisions and gain knowledge about Daimler's technologies. Despite Daimler repeatedly stressing that it views Geely as a shareholder, and thus not in the same light as long-term partner BAIC, concerns persist. Thus, so far the Geely investment, which could actually have acted as a catalyst to the stock, is currently resulting in the opposite. I view that as an overreaction and consider the Geely investment beneficial to Daimler as it establishes another partnership with a financially strong partner.
2. Investors are very disappointed with Daimler's stock performance. Granted, a loss of almost 22% over the last three years and a minimal plus of 1% over the last year do not get investors excited. However, as I am not interested in selling my shares but instead aim to generate more and more income by buying undervalued companies, I really welcome the fact that investors are only seeing the negatives with Daimler and other car manufacturers. You can ponder all-day long about more and more investments into future technologies and impossible-to-quantify-and- qualify-potential-penalties but in fact you could do that with every company. The better way to deal with that is to accumulate shares at higher yields and study the company's future strategy paper "Leadership 2020 - The future of our corporate culture."

   

   Source: Daimler Corporate Presentation / Q2 2017 / page 37

   3. Investors are worried about significant investments into future technologies. The transformation of the automotive industry is the core strategic challenge the company is facing and therefore it has very ambitious plans in place. This will be the biggest transformation in Daimler's history and the company is fully equipped to deal with that. Daimler's Five Cs which represent five strategic areas the company is concentrating on will prove valuable. In a nutshell, Daimler aims to expand its CORE business while aggressively pushing forward with connectivity (C), autonomous driving (A), shared mobility (S) and electric mobility (E) technologies (CASE topics).

   

   Source: Daimler Corporate Presentation / Q2 2017 / page 75

   To accompany such a massive business transformation Culture will have to evolve as well. The same applies to the Company structure where Daimler is exploring how a future holding structure could work like. The goal of this is to make Daimler more flexible to respond to developments in the automotive sector and streamline the company for its 2020 strategy. A proposed setup envisions three pillars: Mercedes-Benz Cars and Vans, Trucks and Buses and Financial Services. The goal is not to split up the company but to allow for partial IPOs, if any at all. This should result in cost synergies and could also lead to higher valuations of the individual units instead of valuing them all in one. And finally, the Customer - as all these changes are meaningless if they do not meet the needs of the customer.

By 2019, Daimler targets to produce the company's first fully electric vehicle under the newly established EQ brand with 9 more models to follow soon.

This push into CO₂-friendly technologies is also absolutely necessary given the strict EU CO₂ emission targets which require 95 g/km CO₂-emissions for fleets by 2020. As of 2016, Daimler's fleet emissions amount to 123 g/km on average and thus a distant 23% away from the 2020 target.

This concludes the key learnings I took from that general meeting. Let's now turn to the most exciting aspect for dividend investors, which is of course the dividend.

Stellar Dividend Growth

Daimler goes ex-dividend on April 6 with payment due on April 10, 2018. As a German stock Daimler pays an annual dividend on that date which currently amounts to €3.65 representing a 5.2% yield based on Thursday's closing price.

Source: Daimler Investor Relations

The automobile industry is highly cyclical and as such it is no surprise that Daimler slashed its dividend during the financial crisis at first and then completely cut it for 2009. This looks very dramatic but was also more extreme than it should have been as Daimler was still digesting dumping Chrysler to Cerberus back in 2007. Still, as soon as the economy started growing again, so did Daimler's dividend. Overall, despite the economic crisis in 2008/09, Daimler grew its dividend by around 11% CAGR over the depicted period.

For the next two years analysts are only expecting minimal growth in dividend as the company has to invest massively into the strategy outlined above. I am perfectly okay with that as the company currently offers an extremely high starting yield. As the company is expected to drop by its dividend of €3.65 tomorrow this would result in an opening price of around €65.85. Assuming the company will keep its dividend steady, this means that investors can lock in a 5.5% forward yield as they get paid handsomely while the company focuses on executing its strategy.

Takeaway

Overall, studying Daimler's 138 slides strong corporate presentation it delivered in summer 2017 reveals a very clear picture about the company. Currently, its business is setting record after record but the company is not resting on its success. Instead, it has developed a holistic and profound 2020 and beyond strategy to deal with all the predictable future challenges the company is facing. This outlines that the company has clear focus and awareness of what is going on in its industry. With its more than 100-year history the company knows what it takes to evolve. Being the pioneer of the automobile, the company has grown into one of the world's most successful premium car manufacturers with ample financial resources, great technologies and a deep pool of talent, knowledge and experience among its staff.

I am a dividend investor and as such look forward to the expected ex-dividend drop on April 6. Unless the market's recent rally on softer trade fears eliminates much of that ex-dividend discount, I will use that as an opportunity to add to my holdings. I believe in the company. I love its products. I love Daimler's dividend and sooner or later Daimler's stock will follow suit.

Investors believing in this thesis continue to find an attractive entry opportunity in the stock right now and can eye to lock in a 5.5% forward yield.

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