On Monday, HSBC issued a downgrade for Porsche (ETR:P911_p) Automobil Holding SE (PAH3:GR) (OTC: POAHY) stock, shifting the rating from Hold to Reduce. The firm also lowered the price target to €26.00 from the previous €36.00. This move reflects concerns regarding Volkswagen (ETR:VOWG_p)'s dividend and its impact on Porsche's cash flow.
According to HSBC, the consensus forecast for Volkswagen's fiscal year 2024 dividend, which will be paid in the calendar year 2025, has decreased by 31% since the beginning of 2024. The new consensus estimate stands at €6.05, below HSBC's own forecast of €6.50. Notably, the lowest forecast in the company-collated consensus is just €0.50.
This anticipated reduction in Volkswagen's dividend is critical for Porsche because the dividend from Volkswagen constituted approximately 102% of Porsche's free cash flow (FCF) in 2023.
HSBC's analysis suggests that if Volkswagen were to skip its dividend in 2024, Porsche would have to rely on the dividend from its P911 model, which is currently projected to be €2.00 by consensus. Under these circumstances, HSBC estimates that Porsche's cash flow in 2025 would only be sufficient to cover about 70% of its interest costs.
The firm emphasized the speculative nature of these concerns but also noted that they represent a significant risk. The uncertainty surrounding Volkswagen's dividend has cast doubts on the financial stability of Porsche, leading to the downgrade and reduced price target.
In other recent news, Barclays (LON:BARC) has upgraded Westlake's stock, citing potential in cash deployment and housing recovery. Meanwhile, Porsche Automobil Holding SE experienced a downgrade from Stifel, which moved the company's rating from Buy to Hold. The firm also significantly reduced Porsche's price target to EUR45.00, a notable decrease from the previous target of EUR69.00.
These recent developments are a result of Stifel's revised expectations for Volkswagen's earnings per share (EPS) and its dividend payout ratio. The firm projects a decrease in the dividend inflow from Volkswagen to Porsche by approximately EUR500 million annually.
This scenario, labeled "2025: big risks, big opportunities," implies a cautious outlook for Volkswagen's financial performance and, consequently, Porsche's ability to deleverage through dividend payments.
Stifel's analysis suggests that the reduction in expected dividends from Volkswagen may be temporary and may not affect Porsche's fundamental value. However, it prompted a review of Porsche's attractiveness as an investment compared to directly investing in Volkswagen or its products. This led to the application of a long-term average holding discount of 32%, resulting in the new target of EUR45.00 for Porsche.
This adjustment reflects Stifel's revised expectations for Porsche's investment prospects in light of the anticipated lower dividend contributions from Volkswagen.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Porsche Automobil Holding SE's financial situation, providing context to HSBC's downgrade. The company's adjusted P/E ratio of 2.74 and Price to Book ratio of 0.19 for the last twelve months as of Q3 2024 suggest that the stock is trading at relatively low multiples, which aligns with HSBC's concerns about the company's future cash flows.
InvestingPro Tips highlight that Porsche is "trading near its 52-week low" and "pays a significant dividend to shareholders," with a current dividend yield of 4.79%. However, the dividend growth rate has been negative at -1.89% over the last twelve months, which could be a reflection of the concerns raised about Volkswagen's dividend impact on Porsche's cash flow.
Despite these challenges, InvestingPro Tips also note that Porsche "has maintained dividend payments for 29 consecutive years" and that "liquid assets exceed short term obligations," which may provide some reassurance to investors about the company's financial stability in the near term.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Porsche Automobil Holding SE, providing a deeper understanding of the company's financial health and market position.
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