Volkswagen: Get Paid 8.3% For Holding One Of Germany's Crown Assets

Germany is known for its strong industrial prowess, and within that landscape, Volkswagen (VW) (OTCPK:VWAGY, OTCPK:VLKAF, OTCPK:VWAPY) stands as a titan, both in terms of automotive manufacturing and its strategic importance to the nation's economy. In fact, investors should consider that the Volkswagen group is Germany's biggest employer, with an estimated 300,000 workers on the payroll (estimated at about 45% of the company's 651,000 global workforce). Moreover, the conglomerate owns some of the most successful brands in the automotive industry, including VW itself, Audi, Porsche, Bugatti and Lamborghini.

Beyond its dominating position as an automotive leader, Volkswagen is interesting to investors because of its high dividend yield -- an 8.3% quoted yield that's hard to ignore, and looks relatively safe on the backdrop of the company's fundamental strengths. In this article, we'll delve into the world of Volkswagen, exploring why it's considered one of Germany's crown assets and how it's setting up investors for an impressive dividend payout.

The Volkswagen Legacy - A Driving Force in the Auto Industry

Volkswagen, often referred to as VW, is an automotive giant with a legacy that stretches back to the 1930s. Founded under the Third Reich, Volkswagen was originally envisioned as a car for the German people, hence the name "Volkswagen," which translates to "people's car." This historical context, while controversial, underscores the brand's deep-rooted importance in Germany's industrial history.

Over the decades, Volkswagen has evolved into one of the world's largest automakers. It owns a portfolio of iconic brands, including Volkswagen Passenger Cars, Audi, Porsche, SEAT, Škoda, Bentley, Bugatti, Lamborghini, and Ducati. This diverse range of brands covers a broad spectrum of the automotive market, from affordable family vehicles to high-performance luxury cars.

Volkswagen isn't just a key player in the automotive industry; it's a cornerstone of the German economy. The company is headquartered in Wolfsburg, Germany, and it's the largest employer in the region. Its influence extends far beyond job creation. Volkswagen's economic footprint touches various aspects of Germany's economic landscape, from local suppliers to the broader export market. Moreover, Volkswagen plays a vital role in shaping Germany's international trade. As one of the country's leading exporters, it's deeply connected to global markets, contributing significantly to Germany's trade surplus.

All that said, the basic point that I would like to make relates to Volkswagen's importance for the German economy. Because if an investor believes in the strength of Germany as an industrial power-house, then it is hard to see Volkswagen as a loser.

Weathering Industry Challenges

On a long-term perspective, however, investors should not forget that over the years, Volkswagen has demonstrated its resilience in the face of macro challenges. And despite industry headwinds, the company has maintained its position as a dominant force in the market. More specifically, the Volkswagen equity story is actually a story of steady revenue growth and value accumulation. Over the past decade, both revenues and gross profits have expanded at a close to 2% CAGR, in line with the GDP growth of the German economy.

Zooming In On Latest Numbers - Volkswagen's Financial Strength

Even in the latest episode of macro challenges, referencing the energy crisis, the Ukraine conflict, the deteriorating consumer sentiment, and unfavourable inflation/ rates dynamics, Volkswagen has actually performed quite strongly: In Q3 2023, Volkswagen AG reported trailing nine months vehicle shipments of 6.7 million, up 11% over the same period one year earlier. Net revenue was up 16%, recorded at EUR 235.1 billion.

For the full year 2023, Volkswagen maintained all-strong confidence about the group's profitability, adjusting the company's operating margin guidance from 7.5% to 8.5%, suggesting operating profits of about EUR 22.5 billion. Accounting for about EUR billion of interest expenses, and a 25% effective tax rate, I model Volkswagen's distributable earnings for FY 2023 at about EUR 15 billion. This is about three times the size of the company's projected 2024 dividends at EUR 4.5 billion, suggesting a notable margin of safety for the implied 8.3% dividend distribution yield.

The Future of Volkswagen - Embracing Electrification

A key element of Volkswagen's financial strength is its ability to adapt. The company has consistently invested in research and development, enabling it to stay at the forefront of technological advancements in the automotive sector. This commitment to innovation has helped Volkswagen to supercharge the company's EV ambitions following the "Diesel Skandal" in 2015. Today, Volkswagen is quite able to effectively compete in the electric vehicle space, providing a security net in the energy transition debate. One of the cornerstones of Volkswagen's EV strategy is the development of its MEB platform. This platform underpins a range of electric vehicles across its brands, making it a cost-effective solution for mass EV production, targeting a 20% BEV share for 2025. But also in the high-end, premium segment, the Volkswagen group is a formidable EV player.

Specifically, investors should note that Volkswagen has a quite "complete" portfolio to compete with Tesla on car models: The ID.3 and ID.4 are part of Volkswagen's ID series, designed to take on Tesla's Model 3 and Model Y. The ID.3 is a compact electric hatchback, while the ID.4 is a compact electric SUV. These models offer competitive pricing, a range of battery options, and the backing of Volkswagen's well-established brand. Against the Model X, Volkswagen can offer the Audi SUV e-tron; and against the Model S, Volkswagen can offer the electric Porsche Taycan. Today Volkswagen holds about 7% share in the BEV market, only behind Tesla (TSLA) and BYD (BYD).

Risks and Challenges

While Volkswagen has a history of resilience, the conglomerate not immune to risks and challenges. One of the ongoing concerns is the potential impact of global economic volatility on the automotive industry. Economic downturns can lead to decreased consumer spending on big-ticket items like cars. Additionally, Volkswagen has faced legal and reputational challenges related to the "Dieselgate" scandal, which erupted in 2015. The company admitted to installing software in its diesel vehicles that manipulated emissions data. This incident led to significant legal penalties and continues to cause some reputational damages for the firm even today.

Investor Takeaway

Volkswagen is an automotive giant; but it's also a cornerstone of the German economy. As Germany's largest employer, Volkswagen plays a pivotal role in shaping the nation's economic landscape, rendering the conglomerate "too big to fail" for political decision makers.

Despite the current automotive industry challenges and a 25% YTD stock price drop, VW has proven resilient over the years, maintaining steady revenue growth and value accumulation. The conglomerate also seems to be doing quite well in the race towards mobility electrification. In Q3 2023, the company reported strong results, with solid shipment and revenue figures.

With all that said, Volkswagen's implied 8.3% dividend yield appears like a gift to me. A few months ago, a 8.3% yield was only obtainable by investing in high-yield, junk debt. Today, this yield is quoted on the most important company of the German industrial complex. I don't let this opportunity pass by, and I embrace Volkswagen stock buying with both hands.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.