April 25, 2015

Mail Bag: Have You Ever Considered LVMH for the KRIP?

Here is a great question about the world’s preeminent luxury holding company, LVMH, which owns everything from Louis Vuitton to Dior to Givenchy to TAG Heuer, to Thomas Pink to Fendi.

Hi Joshua,

Mail Bag Joshua Kennon PenI not sure if you recognize me but you have replied a few times. I just wanted to know if you have ever considered LVMH for your KRIP or any other way ?? It seems to have all the pre requisites fulfilled. I have been thinking of acquiring some if it ever works out.

Thanks for the blog and everything


Back on September 5th of last year, I wrote that I “met everyone” for our lunch reservation at Yak and Yeti in the Animal Kingdom of Walt Disney World.  The reason I had stayed behind in the hotel room for a couple of hours and separated from the group in the first place, later requiring a meet up, was the same reason I had been catching up on dividend tax treaties: I was obsessively studying LVMH.  I wanted to know how the new socialist government of France was likely to influence the company and whether it was attractive enough to buy, yet.  This was not very well concealed given that I made a point to go check out the Guerlain boutique in the French Pavilion and the Aqua di Parma store in the replica of Italy, including posting histories of those two storied businesses.  In fact, during the Safari trip that day, I kept talking to Aaron about the numbers, trying to get a handle on what the firm’s intrinsic value was, using him as a sounding board.

So, yes.  I have more than considered it.  I’ve stalked it.  I love the company.  There is nothing quite like it in its industry.  It is the Berkshire Hathaway or Walt Disney of luxury goods and owns a stable of brands unlike any collection of high-end products ever assembled.  This powerhouse status shows in the earnings and dividend distributions, with gross dividends growing from €2.10 in 2010 to €2.60 in 2011, and finally, to €2.90 last year.  (Unfortunately, the French government takes a 25% off-the-top bite out of that, meaning an American investor last year would have received a net €2.18 or so until tax time, at which point he or she could take advantage of the 15% rate permitted between the two nations as part of a tax treaty, reclaiming the 10% that was withheld in excess of the effective dividend tax that should have been applied.  This is not possible if you hold your shares in a tax-sheltered account, such as an IRA; only a plain vanilla, fully taxable brokerage account.  Thus, part of your dividend will come in the form of a rebate on April 15th when you file your taxes with the IRS, as your effective tax bill is lowered by that 10% excess prepayment that you are going to reclaim.  This is why the dividend calculations are so much more complicated that if you were to just buy shares of a corporation here in the United States.  It’s also one of the reasons so much of my international portfolio finds its way to countries like Great Britain, and not France, because there is no withholding of dividends, making the entire process much easier and straightforward.)  

At this particular moment, LVMH is trading for €132.65 on the Paris stock exchange.  It’s not cheap.  It’s not terribly expensive.  That is my dilemma.  I see much better bargains, sometimes in the most unexpected of places.

I explained this during my last post on the KRIP when I talked about General Electric.  A giant firm like General Electric at current valuations is almost certain to provide a dividend-yield-on-cost of 5% to 6% within the next five years, and likely have an intrinsic value in the $35 to $50 range, as long as the global economy remains on its current trajectory.  At barely more than $23 per share, nobody wants it.  

It’s just sitting there in plain site because it isn’t going to be an Apple, making you rich overnight, and it scared retirees as a result of the dividend being cut during the recession.  The problems are almost entirely behind it, though.  That’s what I mean when I reference the dislocation in valuation.  If the world stays perfectly mediocre, the margin of safety in the valuation of General Electric is more than sufficient to provide perfectly average rates of return.  The aggressive investors find it boring; the conservative investors are now gun shy.  Therein lies the opportunity.  Nobody wants to be average but you can get very rich being average if you build a diversified enough portfolio, consisting of multiple cash generators that are non-correlated, arranging your life so that you are constantly receiving an ever-increasing stream of money from the holdings.

To answer your question:  Yes.  Absolutely, yes.  I love LVMH.  I can’t wait for it to get to a point where I feel comfortable owning it, and it’s not terribly far away – one could probably do well buying it at these prices if you held onto it long enough.  When it does, I will almost certainly add it to the KRIP.  It’s exactly the type of business I want to own for a very long time, and that I want to see direct deposit money into my accounts on a regular basis.

The reason I have so much fun with the KRIP is it is like a real-world version of playing The Legend of Zelda or a strategy game.  I don’t know how long it will take me, but my quest is to collect a treasure chest full of assets, stuffed with very large blocks of companies such as Brown Forman, LVMH, Colgate-Palmolive, Clorox, Coca-Cola, Nestle, General Mills, and a couple dozen other firms that mint money like it’s going out of style.  As someone who uses a value approach, the biggest impediment is the rationality of other investors.  There will come a time – there always does – when a particular ownership stake will be attractively priced.  You buy it then, and hold on for dear life as you collect the cash it sends you.  These special businesses, which have characteristics very different from most ordinary firms, are not to be treated lightly.  In the end, you want this story to repeat itself in your life as much as possible.

  • FratMan

    Are there any countries you won’t invest in due to concerns about their political stability or the fear that the United States could potentially go to war with that country and suffer asset wipeout?

    And as an aside, how does the rise of the multinational corporation shape the future of potential wars?*

    *Maybe I’m asking the wrong question, because if political actors have nuclear weapons, war becomes suicidal.