A few days ago, Lewis Hamilton caused a sensation in both motorsport and the automotive industry. The most successful Formula 1 driver of our time is moving from Mercedes-Benz to Ferrari next year. Even if the departure of the seven-time champion comes as something of a surprise, the shareholders of the German car manufacturer in particular need not be sad about it. According to media rumors, the British driver's salary expectations were too high for the thrifty Swabians.
Strict cost discipline has long been at the top of the agenda for the brand with the three-pointed star. Together with the focus on luxury cars, the strategy ensures rising returns - much to the delight of investors. The Board of Management is expecting 12% to 14% in the dominant car division in 2023. After nine months, the operating margin of 13.6% was not only already at the upper end of the range, but also exceeded that of arch-rival BMW by a whopping 3.3 percentage points. According to an analysis by the auditing and consulting firm Ernst & Young, Mercedes-Benz was even the most profitable car company in the world in the third quarter.
Investors will find out how much the Group earned for the year as a whole on February 22 when it presents its balance sheet. However, a few facts about the course of business are already known. Mercedes-Benz sold 2.04 million cars last year, which was roughly the same as in the previous year. The fact that there was not enough growth is due to the final quarter. Between October and December, sales fell by 4%. In addition to the model change for the important E-Class, supply bottlenecks for 48-volt batteries also had a negative impact. Speaking of batteries, the e-car division performed above average last year. Sales of fully electric vehicles (BEV) increased by 61% to 240,600 units. As a result, the BEV share of total sales rose from 7% to just under 12%. The Stuttgart-based company's delivery vans were also well received. Mercedes-Benz set a sales record in this segment with an increase of 8% to 447,800 vans, meaning that a total of almost 2.5 million vehicles were sold. On a positive note, the van segment is particularly profitable with an operating margin of 15.6% at the end of September.
As with passenger cars, models equipped with a combustion engine continue to predominate in the van segment. Currently, this even appears to be an advantage, as while the market for electric vehicles has recently seen a flattening growth curve, conventional engines are once again enjoying great popularity. This is shown by the latest figures from US car manufacturer GM, which has seen surprisingly robust demand for conventional drives. "The combustion engine is running smoothly again," commented analysts from investment consultants Evercore ISI on the development.
Despite the current drop in momentum in e-mobility, there will be no way around electric cars in the long term. This is why Mercedes is also gradually converting its portfolio to all-electric vehicles. From next year, there will only be new electric platforms. More electric cars also means more batteries. To meet the demand, Mercedes is currently developing a new, standardized battery generation that will be used in 90% of future vehicles. The battery cells will be manufactured in the eight gigafactories worldwide that the Stuttgart-based company is planning to set up together with partners. While this is still a long way off, new models are already in the starting blocks. To keep the model range fresh, the EQA and EQB models, among others, are getting a facelift this year and the CLE series is being expanded to include a convertible.
Mercedes-Benz needs a lot of capital to be able to afford the journey into the future of the automobile. This makes the latest development in free cash flow all the more pleasing. According to preliminary calculations, free cash flow, which is regarded as an indicator of a company's current financial strength, rose to EUR 11.3 billion last year. The cash inflow not only exceeded the company's own target, which envisaged a slight increase on the previous year's figure of EUR 8.1 billion, but also exceeded market estimates. The average forecast was EUR 9.9 billion. This money will also support the high dividend payment from Mercedes-Benz. With a recent payout ratio of 40%, the Group has been one of the top dividend payers in the DAX for years. If Mercedes were to pay out an unchanged dividend of EUR 5.20 per share this year, this would equate to a dividend yield of around 8% at the current share price level.
At first glance, the generous dividend yield could tempt you to buy the share. But be careful: on the day of payment, the share price is adjusted for the distribution. The new Softcallable Barrier Reverse Convertibles promise an even higher return - without the share price having to recover after the dividend discount. The product structure gives Mercedes-Benz shares even more downside potential. The products, which are offered in CHF and EUR, each have a risk buffer of 31%. If the DAX member does not breach the barrier during the maximum term of 18 months, the maximum return is achieved. The coupons amount to 8.80% p.a. for the CHF variant and as much as 10.20% p.a. for the EUR security. For both products, the issuer's soft callable function allows early termination after six months at the earliest.
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