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« February 12, 2014 8:11 pm
L’Oréal to use up excess cash by paying dividends
(c) By Adam Thomson in Paris, Financial Times
L’Oréal intends to continue increasing dividend payments as the principal way to use its cash, chief executive Jean-Paul Agon told the FT.
Mr Agon, head of the world’s largest cosmetics group by sales, said that this was a higher priority than returning cash to shareholders by means of share buybacks.
“For investors today, a company that offers a very steady and increasing dividend year after year is important,” he said.
His comments were made after the Paris-based company announced on Tuesday that it would buy 8 per cent of its share capital back from long-term investor Nestlé, in a deal worth an estimated €6bn.
Mr Agon described the move as “the most important in the long term relationship between Nestlé and L’Oréal over the past 40 years”. Even so, the share repurchase – the deal stands to reduce the Swiss food group’s stake from about 29 per cent to roughly 23 per cent – was smaller than some had expected.
That has left open the question of what the French company will do with its spare cash in the future.
Analysts expect L’Oréal, which owns a stable of brands including Lancôme, Garnier and Maybelline, to be cash positive again following the share buy-back from Nestlé by the end of this year. Barring any large acquisitions, it is then expected to generate €1.5bn-€2bn in cash after dividends every year after that.
Mr Agon said : “When you generate a lot of cash, the first thing to do is increase your dividends. It is the most logical and natural way to use your cash, and that is what we are doing.”
On Monday, as it reported 2013 full-year operating profit of €3.9bn on sales of €23bn, the company said that it would propose a dividend of €2.50 per share at its annual general meeting in April – an increase of 8.7 per cent compared with the dividend paid last year.
If the latest dividend increase were to be approved, L’Oréal’s payout ratio as a percentage of net profits would rise to 48.7 per cent. A decade ago, it was 36.6 per cent.
Mr Agon, who joined the company 35 years ago, also said that L’Oréal had no immediate plans to sell its 8.9 per cent stake in French pharmaceuticals company Sanofi – a scenario that some observers thought likely if Nestlé were to part with substantially more of its L’Oréal investment.
“It makes sense for us now, for the moment, to keep this investment,” he said of the Sanofi stake, which L’Oréal has held for more than 40 years. “As the stake of L’Oréal for Nestlé is a financially very important stake for Nestlé, it is the same for us with Sanofi.”
However, he did not rule out changes. “We have always said that if there was a sizeable acquisition we could do, we would definitely consider use of the Sanofi stake.”