Summary

• L’Oreal is a leader in global beauty market. It has strong brands, wide and highly profitable product portfolio and great future prospects.
• The company’s sales and profits grew faster than market in disruptive 2020. The growth was supported by new product launches, marketing efforts and cost control. Asia contributed significantly to the success.
• L’Oreal’s stable and safe dividend in quite low, 1.27%.
• After significant run up in the stock price the company is overvalued by stock evaluation method based on P/E.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

French L’Oreal S.A. (OR) is in beauty business for more than 110 years. It has a portfolio of 36 global brands, built, to high extend, through targeted acquisitions. Under the brands L’Oreal Paris, Garnier, Armani, Redken, Matrix, Maybelline and many others the company creates, manufactures and sells cosmetics such as hair care, skin care products, make up, perfumes, etc. The company has almost 500 patents registered and over 1B consumers in 150 countries. The global market share is about 13%. L’Oreal has the following divisions:

• Professional Products – 11% of revenue in 2020. Creates professional beauty products and supports hairdressers. L’Oreal develops hair industry by leading its digital transformation. The company has 1.5 M partner hairdressers and 250 training studios worldwide.
• Consumer Products – 42% of revenue. Creates skincare, makeup, hair care and hair color products and experiences. The division makes them accessible to each and everyone in the world.
• L’Oreal Luxe – 36% of revenue. Creates exceptional experiences and products. It has both prestigious and specialized brands in a portfolio.
• Active Cosmetics – 11% of revenue. The world leader in dermocosmetics. Offers skincare and haircare products linked to the beauty and health of the skin. It distributes skincare products through pharmacies, drugstores and e-retailers.

CEO Jean – Paul Agon will hand over his duties as of July 2021 to Deputy CEO Nicolas Hieronimus.

The company remains cautious about the first half of 2021, but expects the beauty market to get back to growth in 2021.

   Dividend

The company’s dividend yield in very low, 1.27%. Historically L’Oreal has been a stable dividend payer. In recent years dividend has been increased 5.2% each year on average. As a result of the pandemic the dividend for 2019 was not changed from the previous year. In 2020 dividend is 4% higher than last year. Its payout ratio is also in uptrend but the level is still safe. The company spends on dividends over half of profits. Its net operating cash flow is EUR 5.48 B while dividends paid amount to EUR 2.2 B. So dividend is well covered by both profit and cash flow making it not only stable but also safe. Investors, owning stock for at least two years (continuously held shares in registered form) are eligible to 10% higher dividend.

   Revenue

In 2020 the global beauty market has declined as a result of the pandemic – related closure of sales points. The company’s total revenue was down 6.3% (or 3.6% at constant exchange rates) while worldwide beauty market reduced 8%. So L’Oreal won significant market shares globally primarily due to its exposure to emerging markets. Last year it launched major innovations, reinvested in business drivers and returned to growth in the second half of the year. A fourth quarter growth accelerated at +4.8%. Particularly high growth was in e-commerce with sales up by +62%. E-commerce reached over 26% of total sales of the company for the year (in 2019 it was only 16%). In 2021 L’Oreal expects to grow sales and profits more than market once again.

In Professional Products division the only growing geography was Asia Pacific (+1.5%). China’s performance is praised by the management as spectacular: 24% versus market growth of 4%. Both the US and Europe saw a remarkable recovery in the second half of the year. The number one category for growth was haircare, led by  Kerastase, Genesis, Blond Absolu and other products. In Consumer Products market Covid – 19 heavily impacted the makeup market while hair colour saw double digit growth. L’Oreal Luxe division sales were down only 7.6% while the market sunk about 14% due to the closures of sales points and a drastic reduction in air travel. E-commerce acceleration and performance in China contributed to it. Active Cosmetics posted record annual growth. There was a growth in both e-commerce and in-store as well as exceptional performance in North America and Asia.

In the coming years the company sales should see meaningful growth as management expects sales growth above the beauty market and the beauty market is poised for growth all around the world. This is particularly true for Asia as per-capita spend on beauty is only 20% of Western countries spend, according to the company. L’Oreal generates almost half of revenue in emerging markets, including about one third in Asia Pacific region. Sales by geographic zones (as a % of total sales) are shown on the following picture from the company’s presentation of annual results.

   Profitability

The pandemic related disruptions hit L’Oreal’s profits. Operating profit for the year is EUR 5.21 B, 6% lower than last year and EPS is down 4.8%. At the same time L’Oreal slightly improved its net profit margin due to the rigorous cost control and profitable product mix. Strong brands and innovations give the company pricing power. So with the recovery of economies around the world the company should grow its EPS at least in mid – single digits each year.

   Financial Strength

The company’s financial position is sound. It has only EUR 2.5B in short and long term financial debt whereas cash and equivalents amount to EUR 6.4 B, easily covering debt. It is well covered by operating profit as well: EUR 5.21 B vs EUR 2.5 B of debt.

   Investment case

The estimate of future stock price based on P/E ratio

Future Returns Based on the Assumptions

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

The prospects of the future growth are bright as the beauty market will grow due to the rise of the middle and upper classes, particularly in Asia. The company has very profitable combination of businesses and strong brands. So far L’Oreal has provided shareholders with generous returns in the form of dividends and stock price appreciation. However quality products, innovation, strong balance sheet and growing profits have led to a significant stock price growth. Current P/E of 50 is high compared to the average 28. So the eventual return to the average historical P/E ratio would cause the loss of capital which would not be compensated by the dividend income.

Notes

Data source – the company’s financial reports, presentations and its website. Source of pictures – the company website unless otherwise stated. Dividend and Sales graphs – from the company stockscreen in this website. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article as a starting point for your own due diligence.