L’Oréal

A cosmetics giant with inner beauty?

When choosing a partner, you should of course pay attention to inner values. Beauty fades with time - a great character lasts forever. When choosing stocks, you also shouldn't be dazzled by outward appearances. Especially with an overly high dividend yield, we investors are often led up the garden path. When the share price falls, the dividend yield logically rises at the same time. But how long can that go well if the company isn't doing well fundamentally? With our investments in particular, we should make sure to pick healthy and successful stocks. Cosmetics maker L'Oréal is exactly that kind of company.

The French company operates with numerous strong brands mainly in 4 different segments. The group currently generates the bulk of its revenue in Consumer Products, at around 45%, followed by luxury products at 35%. The Professional Products division contributes 12%, and the brands from the pharmacy cosmetics division account for 8%.

The origins and business model of L’Oréal S.A.

In 1881, Eugène Paul Louis Schueller was born in Paris. At only 23 years old, Schueller earned his doctorate at the elite university Ecole Nationale Supérieure de Chimie de Paris. That same year, he began assisting Professor Victor Auger at the Sorbonne University, where, by the way, Marie Curie also studied in 1891. He quickly proved his chemical skills and in 1907 developed a hair dye that, unlike the dyes of the time, contained only harmless chemicals. The new hair colors of the first testers looked much more natural than with competing products, so Schueller's dye quickly became a bestseller. As a brand name, he used L'Auréale, which derived from the Latin "aureola" (halo). Later he shortened it to L'Oréal. In 1909, he founded the Société Française des Teintures Inoffensives pour Cheveux (English: French Company of Harmless Hair Dyes). But since L'Oréal was a more suitable company name, it was renamed again in 1936.

Since it wasn't only French women who wanted to color their hair, the international market opened up for L'Oréal early on. In general, a new era began for many women after World War I. They were now officially allowed to go to work and earned their first money of their own. Naturally, they wanted to take care of their appearance and maybe cover up a gray hair or two. Besides Italy, Austria and the Netherlands, the USA, Canada and Brazil followed a few years later. But even back then, L'Oréal knew that you shouldn't make yourself dependent on a single product, and it built up a portfolio of all kinds of different beauty products.

In 1928, Schueller took over the Parisian soap factory Savons Français - first he modernized the operation and worked on the quality of the soaps, then he planned new marketing strategies. Later, this very site became the company's headquarters. Besides its own shampoos, the company launched more hair dyes. Among them L'Oréal Blanc, a product for platinum blonde hair - once again hitting the zeitgeist exactly. Over time, the cosmetics company acquired a number of brands. Lancôme has belonged to the company since 1964, Garnier since 1965 and Biotherm since 1970. Maybelline only came to L'Oréal in 1996. By now, over 30 different brands belong to the beauty group. Although product sales have been rising for years, the French company is placing a strong focus on research and innovation. In 2018, for example, 505 new patent applications were added.

What's next for L'Oréal?

In my eyes, the chances are good that the global cosmetics leader's business will continue to run as successfully as before. And I'd like to pin that down on the following three points: 1) Online retail 2) Global growth 3) Sensible acquisitions.

E-commerce is currently growing unstoppably - at L'Oréal too, of course. To position itself even better here, it bought the makeup app ModiFace just last year. With the app, users can apply makeup to their face thanks to virtual reality and, if they like it, put the corresponding L'Oréal products straight into their shopping cart. But the online business is also growing because the cosmetics giant is increasingly working with a number of influencers. Products are presented in blogs or YouTube videos, showing how to use them. In my eyes, that's a classic win-win situation: customers get to know products better than in a short TV commercial, and of course it pays off for L'Oréal and the people presenting the products too.

Away from the online world, the cosmetics business is growing too. The Asian market in particular is an important growth driver for L'Oréal. The middle class there is growing rapidly - more and more people can now afford personal care products. In an environment like that, L'Oréal naturally has an easy time of it. For the coming years/decades, I still see enormous potential for the Asian region. Even in times of crisis, women around the world probably won't stop putting on makeup and making themselves look beautiful. For example, the French company even recorded profit growth during the 2009 financial crisis.

Last but not least, I'd like to mention the point of acquisitions. L'Oréal is always on the lookout for innovative and fitting companies. In 2018, for example, it bought the German natural cosmetics maker Logocos and the hair color specialist Pulp Riot. According to a statement by L'Oréal CEO Jean-Paul Agon, the company currently isn't buying large companies in order to grow, but is betting on smaller firms in their early stages that it can still make big and global. With its broad distribution network, it also has significantly more opportunities for this than some competitors.

And what about the dividend?

Shareholders have received a dividend year after year since 1981. Since 1982, it has also been raised every year. The dividend growth rate over the last 10 years averages an impressive 10.9 percent here. Wow! Simply 10% more income than the year before. The current dividend yield is only 1.5 percent, but together with the increases, you can benefit from attractive compounding with L'Oréal in the long run. At almost 55%, the payout ratio is already a bit high, but the cosmetics company still has more than enough money left over to keep researching and growing.

Conclusion:
L'Oréal is the global market leader in cosmetics. It has set itself up solidly here with 4 different divisions and is well armed for an economic downturn. In my opinion, the makeup pro has a dazzling future ahead of it in the long term. Anyone who wants to pretty up their portfolio a little will surely enjoy this stock.