L'Oreal (Paris:OR)

L'Oréal is the world's largest producer of cosmetic products by turnover. The company sells hair care, skin care, makeup, deodorants and fragrances through its 27 brands spanning all income levels. In 2008, L'Oréal acquired Yves Saint Laurent Beauté, further increasing its presence in the luxury market. Its two main competitors are Revlon (REV) and Procter & Gamble (PG).

The origins of L'Oréal date back to 1907, when Eugène Schueller, a young French chemist of Alsatian origin who graduated from the Institute of Applied Chemistry in Paris in 1904, developed a synthetic formula based on harmless chemical compounds for dyeing hair called "The Aureale", named after a fashionable women's hairstyle at the time, reminiscent of a halo.

In 1909 he founded the French company of harmless hair dyes. The company is based in a two-room apartment in Paris, which serves as both an office and a showroom. 1928 marks the acquisition of the French Soap Society, created in 1920, better known by its brand name Monsavon. It symbolizes L'Oréal's entry into consumer products. Monsavon has since been sold to the group Procter & Gamble, then Sara Lee and finally the Unilever group since 2011.

Eugène Schueller put his personal resources into the formation of the far-right group "La Cagoule" of which André Bettencourt was a member. In 1942, Eugène Schueller sent André Bettencourt to Switzerland in order to "aryanize" society. Nestle of which he became one of the main shareholders. After the war, André Bettencourt married Liliane, the only daughter of Eugène Schueller, in 1950. As of December 31, 2010, the majority shareholders of the company are the Bettencourt family with 30.9 % and Nestle with 29.7 %.

By 2025, 41.51% of people in Europe, the United States and Japan will be over 50 years old. As the population ages, baby boomers, the number of Americans over the age of 50 is growing at a faster rate than the number of those under 50. This is a promising trend for L'Oréal because older age groups are demanding more cosmetic products, particularly anti-aging skin care.

L'Oréal offers a modest yield of 1.89%, slightly below the long-term average (2.12%). This indicates a high valuation of the stock, confirmed by the strong price increase since 2009 and a P/E of 28.13. Dividends have increased in recent years at a sustained annual rate of 10.59%. The payout ratio remains prudent, at 42.20%. The company has very low debt, with a debt-to-equity ratio of only 0.06. The liquidity ratio stands at 1.15, while the company can boast remarkable profitability, with an ROE of nearly 15%.

L'Oréal, due to its sector of activity, is not very sensitive to market variations. But its orientation towards luxury still has a small cyclical effect on the share price. This translates into a beta of 0.64 and a volatility of nearly 15%.

Emerging markets are the main drivers of L'Oréal's growth, accounting for a third of its sales. The company expects to increase this share to over 50% in the coming years. Thanks to this strong presence in emerging markets, the stock is not very sensitive to dollar fluctuations, with a $risk of -0.18. This means that a drop in the greenback does not tend to negatively impact the value in CHF, which can be the case for European or Swiss multinationals that trade heavily in dollars.

 

In the end, L'Oréal receives three stars, which is a good risk/return ratio. Dividend growth is good and the payout ratio is prudent. The stock is not too volatile and even offers good diversification in a portfolio highly valued in dollars. It is a great company, with a long history, and probably a rich future, in a defensive sector, despite a somewhat marked orientation towards luxury. However, the stock is too expensive at the moment. We should have taken advantage of buying it in 2009 or 2011. Now we will have to wait for the next opportunity...

Sources: Wikipedia, Wikinvest, Yahoo Finance, Swissquote, dividends.ch