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Two important questions to ask before you buy LVMH Moët Hennessy Louis Vuitton SE (EPA:MC) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through MC’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
View our latest analysis for LVMH Moët Hennessy Louis Vuitton
What is LVMH Moët Hennessy Louis Vuitton’s cash yield?
LVMH Moët Hennessy Louis Vuitton’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for LVMH Moët Hennessy Louis Vuitton to continue to grow, or at least, maintain its current operations.
I will be analysing LVMH Moët Hennessy Louis Vuitton’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, LVMH Moët Hennessy Louis Vuitton also generates a positive free cash flow. However, the yield of 3.71% is not sufficient to compensate for the level of risk investors are taking on. This is because LVMH Moët Hennessy Louis Vuitton’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is LVMH Moët Hennessy Louis Vuitton’s yield sustainable?
Can MC improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 21%, ramping up from its current levels of €7.9b to €9.6b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, MC’s operating cash flow growth is expected to decline from a rate of 10% next year, to 9.9% in the following year. But the overall future outlook seems buoyant if MC can maintain its levels of capital expenditure as well.