Stock Analysis

Danone SA – Stock analysis

Danone SA Stock Analysis

Danone SA ($EPA:BN) is a food producer known for its dairy products. It is number 8 in the Noble 30 Index when measured by their dividend growth track record. Today I will share with you my quick analysis about Danone and asses whether I find it an interesting stock to consider at the current share price.

I also created a VLOG of this post on YouTube in case you prefer watching / listening instead of reading.

Background

Most of us know Danone as a French company, but actually it has its roots Barcelona (Spain). It was founded by Isaac Carasso back in 1919 who at the time introduced a new product that was known for its health benefits: yoghurt.

If you are interested in their history and if you have 11 minutes of time on hands, then I highly recommend to watch the following video ๐Ÿ‘‡

Fast forward to 1972. This is the year Danone really became the company as we know it today. BSN and Gervais Danone decided to merge with each other and that gave Danone the international exposure which it needed to market their products internationally.

Fast forward again, but now to today. Danone is a typical consumer staple and operating in 130 countries across all five continents. It’s biggest competitors are Nestle and Unilever which are the companies to “beat”. Within that sector, Danone is the worldwide leader for dairy and plant-based products, the worldwide leader for specialized nutrition and the challenger (#2) for packaged water.

These are very strong positions based on strong brand reputation. Consumers trust Danone because one of the main reasons is their persistence in doing good for the people that consume their products. Most recently they have made a very progressive step by adopting the “Entreprise ร  Mission” model. Effectively this is the French version of shifting from a Shareholder management approach to a Stakeholder management approach.

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Source: danone.com

Having said that, I am a health conscious person and especially when it comes to food. I truly believe that Danone is one of the best massive food producers in the world and they have some very strong catalysts with their product-strategy approach. One of the best examples for me is their focus on plant-based brands (i.e. Alpro) which are essential products to support the European trend of veganism.

This is clear in their sales figures. Danone made 25.3 bln Euro in sales in 2019 which was an increase of 2,5% compared to 2018. This might not sound like that much, but if you compare it to Nestle (1.2%) and Unilever (1.9%) then these are very good numbers.

Danone Dividend Safety

Is Danone’s dividend safe? Thatโ€™s the main question that I want to answer as a dividend growth investor. Let me therefore explore several determining factors first and then get back to you with my answer.

Danone Dividend history

Danone has a very good dividend growth track record. I have been able to track their dividend growth back all the way until 1988, hence 32 years. I actually wouldn’t be surprised if they were growing their dividends before that time as well, but I simply couldn’t find any data to confirm that.

Danone isn’t a pure growth play though. According to my data they have maintained their dividends in 2013, 2009 and 1995. This hasn’t really impacted the overall generational dividend growth, because they grew their dividends with:

  • 6.9% annually from 1990 to 1999
  • 9.7% annually from 2000 to 2009
  • 4.9% annually from 2010 to 2019
Danone 10 year dividend growth

4.9% percent annualized growth over the last 10 years is slightly below my own portfolio target, because I prefer to see it around 6% to reach my financial freedom goals. It is definitely not bad though!

Earnings / Cash Flow

Their Earnings and Free Cash Flow (FCF) have been covering the dividend nicely. The payout ratio has been hovering around 60% for the last 5 years and the dividend growth has therefore be in lockstep with their average trend in Free Cash Flow growth.

I like to see that, because it means that the company isn’t aggressively eating away from its own margin of safety. They might need that in the future to keep the dividend growing in case there would be some earnings headwinds (as actually was the case in 2014).

Danone EPS / Free Cash Flow performance 2010 – 2019

So far so good. So what have they done with the remainder of the cash flow? I am in favor of share buybacks, if done well, because it could be a very effective wealth generator for us as shareholders. So let’s have a look at that below.

Danone Shares Outstanding 2010 – 2019

Clearly they haven’t been aggressively buying back shares. They have actually increased their share count a bit in the last few years. One of the reasons for this is their group performance shares policy which is another word for paying out bonuses to their employees in the form of shares.

Personally I would prefer companies to rather expense those and include them in the EPS numbers, but I guess it’s common practice to rather dilute the share count for the existing shareholders.

So to sum it up, reasonable EPS and Free Cash Flow growth and healthy payout ratios, but a slight increase in shares outstanding makes this a quite decent result.

Debt

Let’s have a look at their balance sheet as well, because having to much debt and debtor obligations could put a growing dividend at risk as well.

As you can see, the long term debt was quite stable until 2015, but then it suddenly doubled in size. Good news here, because this was due to the 12.5 Bln acquisition of the WhiteWave Foods Company. This was an excellent acquisition and it has given Danone 1.9 billion in sales in 2019 just from it’s plant-based protein and organic products in response to growing consumer trends such as flexitarianism.

No share buybacks here. Just pure investments in money making and growing assets which will contribute to a growing EPS for many years to come.

I also appreciate that the company has been very aggressive in using their cash flow to pay down the debt. This is so refreshing to see, because many companies have been rather doubling down on leveraging themselves to buyback shares.

I personally prefer to see a debt/equity ratio under 60% and this should be achievable for the company by the end of 2021. This would mean that within 6 years it would’ve paid down almost entirely their biggest acquisition ever.

It almost feels like the company has adopted FIRE practices as a core philosophy ๐Ÿ˜‰

  1. Spend less than you earn
  2. Pay-down debt
  3. Invest in money making assets

All in all, I find their dividend very safe.

There was some uncertainty at the beginning of the pandemic regarding their dividend (see my post here), but it was good to see that they already paid out 2019’s dividend.

Valuation

I’m very impressed with Danone as a company. Off course, it’s not a hyper growth company like Tesla, but I find it an excellent European Dividend Growth company in the consumer staples sector.

But does this mean that now is the right time to consider buying it?

Let’s do two quick checks via the Dividend Discount Model (DDM) and a Discounted Cash Flow calculation.

Dividend Discount Model

The fair value based on my DDM calculation is considered 70 Euro.

See details behind the calculation below

Discounted Cash Flow

The fair value based on my DCF calculation is considered 66.99 Euro.

See details behind the calculation below.

Fair Value

Averaging out the two calculations gives me a fair value of:

68.50 Euro

Today the share price stands at 59.76 Euro. This means that I consider Danone currently 13% undervalued.


Note regarding the calculations: It is fair to say though that a 8.5% discount rate in a zero-interest environment is very conservative. Lowering this to 8% would already significantly increase the fair value to for instance 84 Euro according to the dividend discount model.

This is also one of the reasons why stock prices feel so inflated. Cost of capital is simply cheaper, hence why it results in higher stock price valuations. This is something to keep in mind when central banks start to increase interest rates again!

Final Thoughts and Considerations

I find Danone an excellent company to own and I believe it fits very well in every European dividend growth portfolio. This analysis is a reconfirmation that Danone deserves a Tier-1 spot in my desired portfolio.

It has a strong catalyst with their products targeting the health-conscious consumer and I believe that this will give Danone ample room to grow in the upcoming years.

I consider their dividend very safe. The current dividend yield is around 3.5% an it is 13% undervalued. This gives you a great starting yield compared to other companies including a margin-of-safety to protect the principal of your investment.

I consider Danone at current prices a buy and if it dips below 55 Euro a very strong buy.

That’s why I decided today to buy an additional 25 shares at 60 Euro. I aim to add more to my portfolio in the upcoming weeks if the price drops any further from current levels.

Honestly, I am clueless why this stock is not priced much higher and maybe I’m just missing something. In that case: just let me know! Until then: consider me a buyer ๐Ÿ’ช

Quick Recap

Pro

โœ… Strong catalyst
โœ… Dividend Growth of 32 years
โœ… Good starting yield (3.5%)
โœ… Undervalued by 13%
โœ… Using debt wisely for acquisitions
โœ… Healthy payout ratios

Con

โญ• Slight share dilution over the last 5 years


What do you think about Danone? Are you a buyer right now as well?

Let me know what you think about it in the comment section below ๐Ÿ‘‡

Yours Truly

European Dividend Growth Investor

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@BeursWolf101
@BeursWolf101
3 months ago

Some questions that come to mind: > Why did EPS drop in 2014? > Why is EPS decreasing (17-19)? > Biggest risk to Danone would be (imo) supply chain risk. Do you know where they source their crops / dairy and where their factories are located? Additionally, share issuances are not necessarily a bad thing, just as share buybacks are not necessarily good. Start-ups manage their cash flows by paying their employees with stock options (i.e. Tesla is a prime example). Paying employees with stocks actually does decrease EPS, but it increases free cash flow. In valuing start-ups it is… Read more »

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