Two Of Swedens Finest Companies, Period

This is the second post aimed at you readers that don't live in Sweden or in any of the Nordic countries and for whom many of my holdings might be unfamiliar. In this post I will introduce two stocks that I own which are listed on the Swedish stock exchange (Omx Large Cap). You can view what other holdings I own in the left hand side of the main menu.

Company 1: Handelsbanken (Ticker: SHB B)
Sweden's most stable and conservative bank founded in 1871. Handelsbanken is one of Sweden's leading banks with 822 branches in 24 countries, and more than 11 500 employees. In the spring of 2013, Bloomberg published its review of the strongest banks in the world. Handelsbanken was at number eleven on that list and the strongest bank in Europe.

Handelsbanken has many fine defensive qualities, which among others the recent banking crisis revealed. Below I have listed some of the qualities that I associate with the bank.

• Natural barriers to entry - not everyone can start a bank and even fewer can reach the volumes that Handelsbanken handles. The higher capital requirements have only made this entry barrier higher.
• Stable and rising dividends over time has increased by a total of 175% over the past 10 years.
• Stable and rising earnings over time. EPS has risen on average 6% per year during the period 2004-2013. 
• The Lock-in effect is generally quite strong among banks - changing bank isn't something do very often. This effect is particular strong with Handelsbanken that has customers who are very loyal to their bank. The results of a survey made by Swedish Quality Index (SKI) for 2013 showed that Handelsbanken had the most satisfied customers in Sweden. Handelsbanken also had top positions in all its home markets, among both private and corporate customers.
• The bank is currently executing well thought-out and systematic expansion abroad (UK and Netherlands), that will contribute to the bank's earnings growth.

This is how the dividend and dividend payout ratio has developed during the period 2004-2013.

Due to last year being so profitable for the bank, the board issued a extra dividend payment, bosting the dividend payout in 2014. The current yield is 4,9% (extra dividend included).

Swedish companies typically distribute dividends once a year in the spring. The board of directors proposes the size of the dividend in connection with the report for the fourth quarter the year before. The size of the dividend that is distributed in the spring is, in other words, based on the previous year's results.

This year the earnings per share are up 10% compared to the same period last year, which does bode well for next years dividend.

Handelsbanken isn't the only profitable bank in the country - the bigest banks in Sweden account for a big part of the total earnings on the Swedish Stock Exchange (Large Cap). This is not a coincident since the Swedish mortgage market is lucrative, where the banks get to barrow money cheap in a market where there is high consumer demand. 

Company 2: Hennes & Mauritz (Ticker: HM B)

The stock that has a place in almost every Swedes stock portfolio. H&M has an impressive history of revenue and earnings growth that has slowed down the last couple of years as the company has matured. 

H&M is probably the stock that's most internationally recognized of my Swedish holdings. The company went from a single women’s wear shop in Västerås, Sweden, to six different brands and 3,339 stores all around the world. Next year H&M is planning to open it's the first stores in India, Peru, South Africa and Taiwan.

The H&M Groups business idea is to make affordable, fashion accessible to people all over the world. This is possible because H&M designs its own products, has no middlemen and buys the product from the market in large volumes.

H&M offers a wide, varied range of fashion for women, men, teenagers and children. The product range also includes shoes, accessories and cosmetics as well as fashion for the home from H&M Home. Added to this are a number of independent fashion brands, each with its own identity: & Other Stories, Cheap Monday, COS, Monki and Weekday.

Besides physical stores H&M is expanding it's online e-commerce presence. Belgium, Bulgaria, Poland, Portugal, Romania, Slovakia, Czech Republic and Hungary are new online markets that the company plans to enter during 2015.

The chart below shows how the company's earnings per share (EPS) and revenue have developed during the period 2004-2013.

EPS growth has been driven by both increased revenues and profitability. EPS have increased on average 8,5% yearly over the period.

This is in turn how the dividend and dividend payout ratio has developed during the period 2004-2013

The average dividend growth rate has been about 10% in the period 2004-2013. The dividend has been at a stalemate the last couple of years, but development thus far this year will surely lead to a dividend hike next year. Sales and profits have increased 17% and 19% respectively he first nine months of 2014.

The average payout ratio during period was about 88%. The current dividend rate is 3,2%. The high payout ratio is due to the fact that H&M can employ about 10% of the profits in it business. There is a limit to how many stores the company can open per year due to infrastructure, personell and distribution.

Characteristics That I Associate With The Company:

• Strong free cash flow from operations.
• Largely insensitive to economic cycles because of it's focus on affordable clothing and home items
• Competitive advantages through scale and being a low cost provider
• Strong balance sheet with a equity ratio of about 70%. 
• Stable earnings and dividend history.

This was a brief introduction of two of my Swedish holdings. My plan is to introduce the rest of my Swedish as well as my Nordic stocks in the coming weeks. If you're interested how fairly valued I think these and my other holdings are, take a look at my Watch List in the upper right hand corner of the blog.