LRLCY - L'Oréal: A Cautionary Note At 40x Earnings

• French cosmetics giant L'Oréal has delivered excellent returns over the past few years – a combination of high single-digit EPS growth, dividends and an expansion of its valuation multiple.
• COVID aside, it still enjoys good prospects with respect to future growth. It leads in high growth product categories like skincare, and in high growth geographies like Asia.
• Its exceptionally profitable business also allows L'Oréal to return relatively large amounts of cash to shareholders. Both of these points support a premium valuation.
• At roughly €304 per share, the stock now trades at circa 40x pre-COVID EPS of €7.74 per share, with the €3.85 per share dividend equal to a yield of circa 1.25%.
• Even with continued high single-digit earnings and dividend growth, the risk of valuation multiple contraction looms large for prospective long-term investors.

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