Numbers reported in € were converted to $ at a rate of 1.20.
Carrefour (OTCPK:CRERF)(OTCPK:CRRFY), a major retailer with more than $90 billion in annual sales, currently offers a solid dividend yield of more than four percent. Due to an overreaction to the company’s most recent earnings announcement, investors can enter or expand a position at a relatively low price right now.
Due to its focus on the European market (mainly France), Carrefour is not very famous in North America, but the company has established a presence in many countries from Asia to Latin America. Carrefour’s investments into ongoing expansion of its business lead to solid revenue growth as seen in the most recent quarter:
Carrefour was able to increase its sales by six percent in the first half of the year, driven by sales increases in markets such as Latin America, where sales rose by a whopping 25% year over year:
Expanding in Latin America is an opportune strategy for Carrefour (as well as for other retailers), as the middle class in the region keeps expanding: The world bank reports that the middle class in Latin America is bigger than ever before, which spells well for Carrefour’s sales trajectory in the region – higher disposable incomes and a more affluent population will lead to ongoing strong demand for the goods Carrefour is selling.
Economic growth is forecasted to accelerate over the next eighteen months, as GDP growth in Latin America will hit 1.4% this year and 2.3% in 2018 – that, again, should be a tailwind for Carrefour’s Latin American ventures.
With a strong outlook in Latin America, it is not surprising that Carrefour invests heavily into its business in that region – the second highest investments after those made in Carrefour’s home market France. The company, which is valued at just $15 billion, has invested about $1.1 billion so far in the current year, which shows that Carrefour is currently spending a relatively high amount to expand its business. Capex totaling about 15% of the company’s market cap highlights a growth-focused strategy, which will likely add to Carrefour’s bottom line in the future.
CRERF Market Cap data by YCharts
Despite heavy investments, the company still aims to produce free cash flows of $1.2 billion this year (in line with 2016), which means that the company’s free cash flow yield is a very solid 7.9% (the company trades at a little less than 13 times this year’s anticipated free cash flows).
With a high free cash flow yield, Carrefour is able to finance a dividend that currently yields 4.1%, which is more than twice the broad market’s dividend yield. Like many other European companies, Carrefour makes only one dividend payment a year, but for long-term investors that should not be too much of a problem – the annual payout is quite high, and whether investors get that amount in four smaller payments or in one larger payment doesn’t change much.
Investors that do not rely on the income derived from their holdings may choose to automatically reinvest any dividends they receive – an option that many investors like a lot:
More than 70% of the company’s dividends are paid out in shares, which shows that Carrefour’s shareholder base is quite confident in the company’s future performance, and which also is beneficial for the company’s cash flows, as less cash has to be paid out to the company’s owners – which, in turn, makes it easier for the company to finance its growth investments.
CRERF data by YCharts
Carrefour trades at multi-year lows right now, as shares dropped by double digits after the company announced its H1 results. The sell-off was primarily based on comments about the sales trajectory in the remainder of the year: Carrefour now expects a 2% to 4% currency-neutral sales increase, slightly lower than the company’s previous estimate (3% to 5%). A one percentage point reduction in the company’s sales estimate is not a positive, but it seems unjustified that Carrefour’s shares dropped from $24 to $20 due to that – the current share price thus looks like an opportunity to buy at a low price (and at a high initial dividend yield).
Due to its focus on Europe and Latin America, Carrefour is not as prominent as more US-focused retailers, but the company is still quite large in size. With heavy investments in growth markets and an attractive dividend yield, coupled with a rather low valuation (based on a price to free cash flow multiple of less than 13), Carrefour could be worthy of a closer look for those investors seeking income and/or an International retail play.
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