Siemens (OTCPK:SIEGY) has seen its share price fall drastically amid the COVID-19 pandemic and now trades at only 9.8x TTM P/E with a 5.2% dividend yield. As a cyclical industrial company, Siemens’ share price has fallen 38% over the past 3 months which is more than the overall market. This article will discuss the historic profitability of Siemens and take a look at its dividend coverage and financial leverage before getting a sense of a cyclically adjusted valuation. This global behemoth looks like a great company to load up on during this market turmoil.
A Diversified & Global Industrial Behemoth
With revenues around 87 billion Euros in fiscal year 2019 and 385,000 employees worldwide as of September 30, 2019, Siemens is a global behemoth. The company is well diversified across its eight Industrial Business segments with its largest business by revenue, Gas and Power, representing only 21% of 2019 revenues as can be seen in the graphs below. Not only is the company diversified through its business segments but it is also diversified through its geographic footprint. The company’s home country of Germany makes up only 14% of revenues with the rest of revenues diversified across Europe, Africa, and the Middle East (37%), the Americas (27%) and Asia (22%).
Source: Siemens – Equity Story Q4 2019
A Profitable And Growing Business
Siemens’s strong operations and product portfolio have allowed the company to achieve average return on equity (ROE) and return on invested capital (ROIC) of 15.0% and 8.2%, respectively, since 2009. This average level of profitability is right around my rule of thumb seeking 15% ROE and 9% ROIC, allowing me to be confident that, in my opinion, the company is able to maintain and continue to increase its intrinsic value over a business cycle.
Source data from Morningstar
On the growth side, book value per share has grown from EUR 22.52 in 2009 to EUR 32.60, which, when combined with the dividends paid out from equity, has an average growth of 10.3% annually and supports the ROE and ROIC averages.
How Safe is the Dividend?
Investors still reeling from General Electric’s historic dividend cut and asset write-downs might be understandably a bit hesitant to step into another industrial conglomerate. However, taking a look at Siemens free cash flow gives me some reassurance that earnings and dividends are well supported by cash and does not reflect the potential value trap problem I have written about regarding GE. While the dividend payout ratio has risen over the past decade from 45.8% in 2009, it is still far from peril at only 59.8% in 2019.
Source data from Morningstar
Financial leverage is extra important when considering an investment in a cyclical industrial company. Siemens looks appropriately financed with financial leverage currently at 3.12x and their interest coverage ratio a healthy 7.66x. This level of financial leverage is below the 3.56x the company had during the 2008-2009 recession which makes me feel comfortable that Siemens should be able to handle a potential turn of the business cycle.
The company’s share count has fallen around 6.7% over the past decade as management has included share repurchases as a key part in their capital budget. I always like to see share buybacks from management, even if they do average only 0.6% annual, as it shows capital budget discipline and faith in the long-term prospects for the business.
Price Ratio And Potential Returns
I also always like to examine the relationship of average ROE and price to book value in a valuation metric I call the Investors’ Adjusted ROE. It examines the average ROE over a business cycle and adjusts that ROE for the price investors are currently paying for the company’s book value or equity per share. With Siemens earning an average ROE of 15.0% over the past decade and the shares currently trading at a price to book value of 1.14 when the price of their ADR $40.00 (equivalent to EUR 37.20 when the exchange rate it 0.93 EUR/USD), this would yield an adjusted ROE of 13.1% for an investor’s equity at that $40.00 purchase price, if history repeats itself. This is above the 9% that I like to see and adding a 3% growth rate to represent the company growing alongside GDP could increase this potential total return up to 16.1%.
Siemens looks like a great company to load up on during this market turmoil at only 9.8x TTM P/E and its dividend yield now at 5.2%. The company is globally diversified and has achieved great returns and cash flows over the past decade which leaves the dividend looking well covered. Siemens level of financial leverage is below what the company had during the 2008-2009 recession which makes me feel comfortable that Siemens should be able to handle the COVID-19 turmoil.
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Disclaimer: While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. The material is intended only as general information for your convenience, and should not in any way be construed as investment advice. I advise readers to conduct their own independent research to build their own independent opinions and/or consult a qualified investment advisor before making any investment decisions. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles.
Disclosure: I am/we are long SIEGY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long Siemens with an average cost base of $47.25.
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