Sometimes a startling piece of news can act as a catalyst to buying a stock. In this case, it was the news that German industrial giant Siemens (SIEGY -0.41%) was issuing corporate bonds with a negative yield. In other words, bond investors were happy to pay in order to lend the company money while the stock was trading with 4%-plus dividend yield. That startling fact piqued my interest, and I bought some stock in the U.S. listing and continue to hold. Here's why.
Four key arguments for buying the stock
The key arguments behind buying the stock also largely apply today too. Okay, the dividend yield is now 3.3% because the stock has appreciated. In addition, the near-term earnings prospects have been diminished by the COVID-19 pandemic. However, the overarching case for buying the stock remains in place:
- The fact that Siemens issued debt with negative yields is not only beneficial to Siemens financially, it's also an indication of the quality of the company's earnings and the bond market's confidence in it.
- Siemens has an excellent history of free cash flow (FCF) generation and its dividend is very well covered.
- Management has been restructuring the company for growth, and it has good growth prospects from automation, industrial software, building control products, healthcare, and renewable energy.
A financially stable company
By buying Siemens debt with a negative yield, bond investors aren't necessarily being stupid. Pension funds and insurance companies need to balance long-term liabilities and need to invest in low-risk bonds in order to offset the risk in their other bond holdings. Moreover, by buying Siemens debt they are also hoping that the price of the bond will go up further.
Siemens has good growth prospects thanks to its leadership position in industrial automation. Image source: Getty Images.
It's also a vote of confidence in Siemens' ability to pay back debt. Indeed, credit rating agencies Moody's and Standard & Poor's have A1 and A+ ratings on the bonds. These ratings indicate, in the words of Moody's, "upper-medium grade" debt that is "subject to low credit risk."
Part of the reason for such a positive rating comes from Siemens' excellent history of FCF generation. As you can see below, the industrial company's FCF easily covers its dividend. Moreover, analysts are expecting 4.3 billion euros and 5.4 billion euros in FCF in 2020 and 2021, putting the company on 21 times FCF in 2020 and 16.7 times FCF in 2021 -- contrast this with the FCF difficulties at its fierce rival General Electric (GE -2.11%)
Data by YCharts
Siemens has good growth prospects
Not only does the company have a very solid financial history, its future looks bright too. Management has been busy restructuring the company in recent years, and the table below will help investors understand just how the company is structured for growth now.
Siemens Healthineers is an independent publicly listed company which will be 72% owned by Siemens after the intended acquisition of Varian Medical Systems. Meanwhile, Siemens is set to combine a 67% share in Siemens Gamesa with its gas and power business and then spin it off into a new company, Siemens Energy, at the end of September. Siemens will retain a 35.1% share in Siemens Energy, but management intends to reduce this share within 12 months to 18 months of the spin-off.
|
Segment |
2019 Income |
2019 Sales |
Activity |
Competitor |
|---|---|---|---|---|
|
Digital industries |
2.9 billion euros |
16.1 billion euros |
Factory and process automation, industrial software, motion control. |
Dassault Systemes, Rockwell Automation, Schneider, Emerson Electric, ABB. |
|
Smart infrastructure |
1.5 billion euros |
15.2 billion euros |
Building control products, low voltage switches, distribution systems. |
Schneider, ABB, Johnson Controls, Honeywell. |
|
Gas and power |
0.7 billion euros |
17.7 billion euros |
Gas and power equipment and services |
GE, Mitsubishi. |
|
Mobility |
1 billion euros |
8.9 billion euros |
Rail rolling stock, rail infrastructure, traffic systems. |
Alstom, Bombardier. |
|
Siemens Healthineers |
2.5 billion euros |
14.5 billion euros |
Imaging, diagnostics, advanced therapies. |
GE, Philips, Roche, Abbott. |
|
Siemens Gamesa Renewable Energy |
0.5 billion euros |
10.2 billion euros |
Wind power and storage solutions. |
GE, Vestas. |
|
Total industrial |
9 billion euros |
82.6 billion euros |
N/A |
N/A |
Data source: Siemens presentations.
Siemens Healthineers and Mobility can be thought of as a relatively stable business generating good cash flows. Meanwhile, the spin-off of the new energy business will create a unified energy company that can service electricity production from either gas or renewable energy. Indeed, Siemens Energy is in a lot better shape than GE's power and renewables businesses right now. In fact, the margins achieved by Siemens in power and renewables are a good target for GE to try to reach.
Siemens Mobility offers a range of transit solutions. Image source: Getty Images.
The restructuring all points to a company pivoting toward its digital industries (largely automation) and smart infrastructure strengths. In a sense, it's a bet on the increased usage of automation and digitization in the factory, and the development of electrified systems in buildings and infrastructure. Both are industries that management sees as having the potential to grow at a low-single-digit revenue rate.
A good stock to hold
All told, Siemens remains an attractive stock and I continue to hold. It's not the fastest-growing stock out there, but it trades on a compelling FCF valuation (16.7 times estimated 2021 FCF) and pays a very useful dividend. And if the bond market wants to pay Siemens in order to lend it money so Siemens can invest and grow earnings for shareholders, then that's fine with me!
