Summary

  • Groupe Danone S.A. (Danone) is the global leader in dairy and plant – based products, well known for its yogurts and Evian water.
  • Dividend is well covered by earnings and free cash flow. Its yield of 3.4% is higher than that of peers. In 2020 dividend was cut by 8% due to the pandemic related disruptions. Its growth was steady and consistent in the pre – pandemic years.
  • Last year organic sales were down 1.5% and organic EPS down 13.2%. The performance in Waters suffered most. It should rebound with easing mobility restrictions and reopening of restaurants and other out – of – home destinations. The company expects 3-5% organic sales growth over mid – term.
  • Danone’s debt is quite high as D/E ratio exceeds 100% but interest payments are well covered by operating profit.
  • There is attractive upside potential in Danone’s stock. However, considering challenges surrounding the company, it is not clear how long will it take for the new management to unlock shareholder value.
Dividend    Revenue    Profitability    Financial Strength    Investment Case

French food and beverage company Danone (BN) is the global leader in fresh dairy and plant – based products. It is present in 120 countries with top markets being the US, China and France. The company has two geographical areas: Europe and Noram with 57% of sales in 2020 and Rest of the World with 43% of sales.

It has the following divisions:

  • Essential Dairy & Plant – based (EDP) – 54% of sales in 2020; produces yogurts, dairy products and plant – based products.
  • Specialized Nutrition – 31% of sales; comprises Early Life Nutrition – foods for babies and young children and Medical Nutrition – foods for people receiving medical treatment and having special food needs.
  • Waters – 15% of sales; provides natural water and aqua drinks.

The company has over 100 brands. The key categories and brands are as follows.

Danone operates in health – driven products categories. It launched “One Planet. One Health” initiative in 2017 to reflect that people’s and the planet’s health are interconnected. The company bought WhiteWave back in 2016 to get access to organic and plant – based beverages.

In March the company announced that a new CEO would be recruited externally after the Chairman and CEO roles have been split.

   Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
EUR 1.94 per share 3.5% 4% per year 65% 2021 May 10

The company’s dividend has been in uptrend, growing 7% each year, up until turbulent 2020, when it was down 8% from the previous year. 5 years growth, taking into account 2020 decline, is 4% per year on average. Dividend yield of 3.4% is higher than that of Danone’s peers, like Nestle (NESN) or Associated British Foods (ABF). Dividend is 65% of earnings per share (EPS). That means that Danone retains 35% of earnings for its business needs. Dividend is also well covered by free cash flow (FCF) with coverage of 1.5x. As the economic recovery gains the pace Danone could be expected returning to gradual dividend increase policy.

   Revenue

Revenue 5Y Growth Revenue growth over 2020 Company Mid – Term Outlook
EUR 23.62 B

 

 

 

1% p. a.

 

 

 

Total sales            -6.6%

Organic sales      -1.5%

Organic sales by divisions:

EDP                     +3.4%

Spec. Nutrition   -0.9%

Water                  -17%

To deliver sales growth in the 3-5% range.

 

 

 

Looking ahead the company expects the broad – based inflation in milk, ingredients, packaging and logistics. Danone should be able to mitigate the negative impact of inflation by passing the price increase to customers in relatively short time period. It expects 3-5% organic sales growth over mid – term. This year Danone expects rough beginning of the year and a return to profitable growth in H2. In Q1 sales report the company says that it is last quarter of decline before returning to growth. Sales are down 9.4% for the quarter, including negative 7% impact of currency exchange rates. Organic sales were up in EDP division and down in the other two. Sales are 6.6% down over the year on a reported basis. This decline results in modest average 5 years growth of 1% per year. In 2020 the negative impact of exchange rates was 5%. Organic sales (sales that exclude the impact of exchange rates and changes in accounting principles) were up in EDP, flat in Specialized Nutrition and significantly down in Waters (as it can be seen in the table above). In EDP Plant – based sales grew at 15%, mainly in the US and Europe. The company aims to reach EUR 5 B of revenue from plant – based products by 2025. The performance in Waters suffered from Covid – 19 related restrictions to mobility but should improve as the pandemic subdue.

   Profitability

Profit 5Y Growth Net Profit Margin ROE Company Outlook
EPS EUR 2.99

Net Profit EUR 1.96 B

 

 

7.3% p. a.

 

 

 

7.3% in 2020

 

 

10.65% in 2020

 

Organic operating margin

in 2021: 14%.

in 2022: 15%.

Mid – term: mid – to – high teens.

Lower sales in Specialized Nutrition, the most profitable division of the company, and slowdown in China have led to lower organic profits in 2020. Operating profit is down 13.6% (EUR 2.8 B vs EUR 3.24 B in 2019) and organic EPS is down 13.2%. Organic operating margin is down from 15.2% in 2019 to 14% in 2020. Efficiency and cost – discipline measures had mitigating effect as they allowed to unlock EUR 0.85 B in savings over year.

In 2021 organic operating margin is expected to be the same as in 2020, 14%. Then the company expects to reach the level above 15% by 2022 and mid – to – high teen levels in the mid – term. 5 years average EPS growth was over 7% per year. In the future we should expect EPS growth around 5-6% as the company expects moderate improvement in organic margin and 3-5% growth in sales volumes over mid – term.

   Financial Strength

Company Capital Structure

In EUR B

Year 2019 2020  
Equity 17.241 16.205  
Cash 0.644 0.593  
Debt 16.57 16.50  
Net Debt 12.337 11.579  
Debt/Equity 96% 102%  

Danone’s D/E ratio is high. It has increased from 96% to 102% over year. Also it is concerning that debt is not well covered by operating cash flow (OCF) as OCF/Debt ratio is only 18%. That could limit the ability of the company to invest in potential future opportunities. The only encouraging sign is that interest payments are well covered by operating profit with coverage of 7.8x. Also on the positive side both debt and net debt are lower than a year ago. The company has S&P long term rating BBB+ with stable outlook.

   Investment Case

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

Assumptions of dividend and EPS growth over the next 5 years
Dividend could grow at 4% per year as in the past. So the total dividend income over the next 5 years would amount to EUR 10.93.

We could assume EPS growth of 5% p.a. Then EPS in 5 years will be EUR 3.82 per share.

Projected stock price
Average P/E over the last 5 years (20.52) multiplied by EPS in 5 years = 20.52 x EUR 3.82 = EUR 78.31.
Future Returns Based on the Assumptions
Stock price upside potential                                       38%    from the current price EUR 56.76

Overall return on investment*                                   57%

Compound Annual Return on Investment               9.5%

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

Danone has strong global brands and leading market positions in many geographies. However Danone’s stock underperforms peers as it struggles to return to organic growth. There are many challenges ahead the new company management should deal with:

  • Consumers increasingly focus on healthy food. Organic and vegan food have promising growth potential. However there is a risk that plant – based products would substitute dairy. Besides, plant – based market gets more competitive, particularly in China.
  • High level of debt limits the company’s financial flexibility.
  • Inflation poses risk to the company performance but should have limited negative impact.

Danone has attractive safe dividend and high future investment returns potential. Sales and earnings growth were decent in pre – pandemic years. However at present there are many uncertainties, including the changes in the company management. It remains to be seen whether Danone is able to return to profitable growth in the coming quarters.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next three days.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. 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 only as a starting point for your own due diligence.

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