CHDRF - Christian Dior: One For Long-Term Dividend Investors

2024-01-09 06:05:51 ET

Summary

• A cooling off in the luxury sector has impacted Dior in the past year, but the current P/E indicates that the stock has overcorrected.
• Even with a slowing down in revenue growth for 2023 and 2024, earnings are still set to increase, which is a positive for dividends.
• The company's 10-year dividend yield on cost is 7%, and with its history of consistently paying dividends over the years, it looks attractive as a long-term dividend play.

Since I last wrote about the luxury fashion brand and company Christian Dior (CHDRF) in October last year, its price has risen by just 1.7%. This isn't surprising, considering the cooling down in the luxury sector's sales last year, which is expected to continue this year as well.

Part of the softening can be seen as the normalisation of demand after a post-pandemic high. In 2021 and 2022, Dior's revenues grew at some of the highest rates in the decade, and only partly because of a low base effect. Additionally, a macroeconomic pullback is also at play now. After a time of high inflation and rising interest rates, a growth slowdown is predicted to continue in the euro area this year and show up for the US economy as well, after it was surprisingly avoided last year.

But just because the outlook for the sector is dim, isn't a reason to give up on Dior. Quite the contrary. Not only is there some price upside possible here, but the dividends for long-term investors look promising too.

Relative price and P/E suggest upside

First, let's consider what's next for the price. It's also worth noting that Dior's performance as the stock markets has lagged that of the luxury sector as such over the past year. While it has softened by 6.7% over this time, the S&P Global Luxury Index has actually risen by 5.6% . This indicates that among luxury peers, it has a better chance of rising this year than the others.

Next, Dior's trailing twelve months [TTM] GAAP price-to-earnings (P/E) ratio is at 18.2x at present, which is appreciably lower than the past 10 years' average of 23.2x .

It also compares favourably with peers. Its parent company, LVMH (LVMHF) has a P/E of 21.6x. Now, LVMH has traded at a higher average P/E than Dior over the past decade of 25.4x. But here's the rub. The difference between the two is 3.1 right now compared to 2.2 over the long term. Considering that their results are essentially the same, with Dior's earnings being a smaller percentage than that of LVMH, there's little to explain the difference and indicates that Dior has overcorrected.

Rising earnings

With earnings expected to have risen in 2023, Dior's P/E can drop even more if the price continues to stay static for now. Here's why. For the first half of the year (H1 2023), its net profit grew by 31% year-on-year (YoY), which is a positive to start with. But even with the expected softening in financials now, earnings are still expected to have risen in 2023.

Revenue growth for the first nine months of the year (9M 2023) already slowed down to 10% compared to 15% for H1 2023 as growth in Q3 2023 was just 1.1%. Even if its growth would have dropped to zero in Q4 2023, the company would still report a 7.2% sales increase for the full year 2023.

Assuming that the net profit margin stays at the same level as in H1 2022 of 8.3%, its net profit would still grow by a noteworthy 21.8%. This, in turn, results in a P/E of under 17x, which is lower than that at present. And this isn't all. Even with continued weakness in luxury markets expected this year, LVMH, which is a proxy for Dior's performance, is expected to see 5.5% EPS growth, which is also a positive for the forward P/E.

Positive for dividends

Even if this year turns out to be worse for luxury demand than anticipated, the company's dividends are still something to consider. This might sound odd at first, considering that Dior's TTM dividend yield isn't exactly the best at 1.8%. It is, in fact, lower than the average of 2.3% for the consumer discretionary sector.

However, the company has a long 20-year history of consistently paying dividends and has been good at growing its dividends too, which have seen a rise in eight of the last 10 years. As a result, over the past decade, the dividends have seen a compounded annual growth rate [CAGR] of 12.6%. Considering that we have a fair assessment of where its earnings will be for 2023, the dividend outlook for 2024 is then positive.

Moreover, the company's dividend payout ratio is at a very decent 32.6% for the last TTM, indicating that it can comfortably increase dividends if it likes even if there is no earnings growth. This also indicates that even if earnings don't grow very much this year, it can still raise dividends next year.

But to save the best argument for last, its price hasn't kept pace with the dividend increase. As a result, the yield on cost for an investment made in Dior 10 years ago is actually a high 7% (see chart above). There's no fundamental reason to expect long-term disturbances to the luxury market. Dior is a well-established brand, and part of the biggest luxury company around. With rising incomes and consumerism, there's only growing demand for luxury. This means, that investors who buy the stock now, can yield safe and improving passive income for years to come.

What next?

The present times might not be the best for the luxury space, but there's still a fair bit to like about Dior. For one, its price still has some upside based on its P/E compared to its own past averages and as compared to its parent company, LVMH.

With earnings set to rise for 2023 and even for 2024, the probability of a price rise only increases. And improves the likelihood of dividend growth as well. The company has seen good dividend increases over the past decade and a positive earnings outlook is encouraging as well, even as the top line slows down.

It might not be the best stock for any trading opportunities, but for long-term investors, it remains a Buy.

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