LVMH Moët Hennessy Louis Vuitton

Cashing in on the fashion hype

Over the past week, the situation with the Covid-19 virus, and with it the situation on the stock markets, hasn't really improved. Quite the opposite: the S&P 500 index fell another 15 percent. New York, where the stock market music plays, has become a ghost town. So Corona will definitely keep us and the entire global economy in a headlock for quite a while yet. Exciting times and wonderful buying opportunities lie ahead for us investors and dividend hunters. Now, in the crisis, the wheat is separated from the chaff - or as André Kostolany would say: in times of crisis, shares move from the shaky hands into the hands of the hard-boiled.

Today let's turn to the beautiful things in life. Moët champagne, Louis Vuitton bags, Givenchy dresses or, soon, Tiffany necklaces. As an invested LVMH shareholder, you're doubly happy whenever you treat yourself or your loved ones to a bit of luxury.

The history and business model of LVMH Moët Hennessy Louis Vuitton SE

Louis Vuitton was born in eastern France on August 4, 1821. Although his father was against it, Louis set off for Paris at the age of just 14. Since he had no money, he walked the 441-kilometer route on foot. To keep his head above water financially, he did odd jobs in various towns along the way. In 1837, when he arrived in Paris, he began his apprenticeship with the luggage maker Monsieur Maréchal. He quickly recognized Vuitton's talent and ambition. Vuitton thus also became the exclusive trunk packer for Empress Eugénie de Montijo. Back then the main means of transport was still the horse-drawn carriage. And since trunks were usually strapped onto the roof, they had a curved top so that rainwater could run off more easily. With advancing industrialization, however, the railroad increasingly became the main means of transport. Trunks had to be stacked - and here, of course, the curve was impractical. So in 1854, at the age of 33, Vuitton decided to open his own business in the middle of Paris: Louis Vuitton Malletier (French for trunk maker).

His trunks were flat, light and airtight, and within just a few years became a globally recognized status symbol for the rich and beautiful. 5 years later, Vuitton opened his first factory in a Paris suburb - 20 employees made his trunks there. While the trunk frame consisted of a wood-and-metal construction, a linen fabric impregnated with rye flour was used for the surface. To keep up with growing demand, Vuitton opened his first store outside France in 1885, right in the middle of London. Together with his son Georges Ferréol, he developed a novel trunk lock and also introduced the well-known checkerboard pattern that's still used today. Louis Vuitton died at the age of 71, and his son took over the business.

At the World's Fair in Chicago in 1893, he presented the expanded product range. In addition to large wardrobe trunks and cabin trunks for ship travelers, trunk-like hat boxes were among the items presented. At the fair, however, he also noticed the many copycat products, so he decided to print his father's initials "LV" on most of his products. Business was booming, and many new store locations were opened. Over the years the product range was also expanded to include handbags, accessories such as wallets, scarves, gloves and belts, but also watches, jewelry and perfume. In 1987 the company merged with Moët Hennessy. The successful champagne market leader Moët & Chandon had merged with the cognac producer Hennessy in 1971. As the new combined group LVMH Moët Hennessy – Louis Vuitton, it is the global leader of the luxury goods industry. LVMH's brand portfolio currently comprises 75 different brands, sold both online and in 4,915 boutiques spread across the globe (70 countries). The brands of course include Louis Vuitton, Moët and Hennessy, but also Fendi, Christian Dior, Bvlgari, Givenchy, Dom Pérignon, Tag Heuer and Hublot, and many more.

How will LVMH develop in the future?

Basically, LVMH has a massive moat. With its many brands across various business areas, it's super broadly diversified and can easily absorb weak phases of individual brands. Of course, there are competitors in the luxury segment too: Kering (Gucci or Alexander McQueen), Hermès and Prada come to mind. However, these 3 companies are nowhere near as well positioned as LVMH. The luxury giant is one of the most valuable European companies as measured by market capitalization. No wonder the group's longtime CEO Bernard Arnault is one of the wealthiest people in the world.

The French company's goal is to own the most exclusive and rarest luxury brands. It's definitely well on its way here; after all, the acquisition of the jeweler Tiffany & Co. is supposed to be finalized in mid-2020. At €14.7 billion, the takeover is the largest in the group's history (so far). With the fine jeweler, LVMH is further expanding its jewelry segment. Tiffany, with its diamonds and the world-famous turquoise gift boxes, generates around 4.2 billion US dollars in roughly 300 stores worldwide.

LVMH also benefits from demographic change and the fashion hype. Even though I personally find it crazy when teenagers buy expensive luxury brands, that's just the way things are right now. Everyone simply wants to show what they've got. You can see this very clearly in emerging countries like India and China, too. That's where LVMH is currently growing its revenue the most. Across all of Asia, the group generates the biggest piece of the pie, at around 37% of total revenue. 24% in the USA, 28% in Europe (9% in its home country of France alone) and another 11% in the remaining countries.

But how will business go now during the corona crisis?

Yes, it will quite certainly feel the economic consequences of the crisis. Just take a look at the stock chart above. From over €414 at its peak, it has crashed to €311 as of today (03/22/2020). But crises in particular have proven to be great buying opportunities in the past. If you bought LVMH stock in 2008/2009, you'd have realized a gain of an incredible 680% to date (on March 2, by the way, it was still almost 1,000%) - mind you, without dividends. If you look at the revenue figures during the financial crisis, you'll find that they kept growing nonetheless. That's pretty impressive, and I'm curious to see how it looks this time ...

One more little side note: the factories that normally make perfume are currently producing hand sanitizer, which is then delivered free of charge to healthcare facilities all over France.

And what about the dividend?

LVMH shareholders have been receiving a profit distribution in the form of dividends since 1993. However, the dividend has only been raised annually since 2009, which is why it can't call itself a Dividend Aristocrat yet. The current dividend yield of 1.99% isn't particularly high, but it's being raised strongly - the average over the last 10 years is 13.1% and over 5 years 16.3%. The payout ratio, at just under 44%, is also still well within the green zone.

Conclusion:
If I had to choose luxury, it would probably be LVMH stock. The group is superbly positioned. It has a broad network of brands that are sold globally, and the company's future prospects are also very positive. So if you'd like to add a bit of luxury to your portfolio, you can grab it now at a special discount.