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Inditex dividend on sale Friday, March 9th 2018

Shares have plunged by 35% from their peak in June 2017, pushing the forward dividend yield to its highest level in 10 years

We foresee 10% dividend growth for FY18 despite recent downwards revisions

Fundamentals remain strong, amongst best in class in profitability and sales growth

Our forecast reflects a payout of 70% with potential upside in the coming years

Inditex’s shares have plummeted in the last ten months, weighed on by fears over a

slowdown in earnings and an ailing apparel sector across Europe. Despite this negative

sentiment, we remain confident in Inditex’s dividend prospects and our forecasting

growth of 10% CAGR in the next four years.

We are forecasting the firm to announce a regular dividend of €0.54 and a special

dividend of €0.20 next week. In this implies a forward yield slightly above 3%, its

highest level since the financial crisis. Not only does the firm have an unbroken pattern

of increasing its dividend since its IPO, it also has a very solid balance sheet and

reported leading margin at Q3.

Should earnings disappoint, we consider the lower level of the dividend to be €0.73. We

see more risk of upside surprise to our forecast, possibly reaching towards €0.77. This is

because its online sales have potential to grow further without cannibalizing its physical

store business model.

1.00%1.25%1.50%1.75%2.00%2.25%2.50%2.75%3.00%3.25%3.50%

Trailing dividend yield vs Stoxx Europe 600 Retail

Inditex STOXX Europe 600 Retail

Source: Factset.

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FY12 FY13 FY14 FY15 FY16 FY17e FY18e

EPS 0.76 0.76 0.80 0.92 1.01 1.08 1.15

Regular dividend 0.38 0.38 0.40 0.46 0.50 0.54 0.60

Special dividend 0.06 0.10 0.12 0.14 0.18 0.20 0.22

Payout ratio 58.0% 63.5% 65.0% 65.0% 67.1% 71.3% 71.3%

Yield 1.8% 2.0% 1.6% 1.9% 2.3% 3.2% 3.4%

Cash aggregate EUR m 1,130 1,378 1,510 1,626 1,871 2,306 2,556 *Estimated dividend yields for FY17 and FY19 are based on closing price as of 7/3/2018.

** Including the special dividend. Source: IHS Markit.

Fundamentals

Delving into the fundamentals, we analysed the recent trend in profitability which shows

slightly tighter operating margin, from 19.5% in FY13 to the current 17.4% reported on

the 9M17 results. Despite the aforementioned trend, we should take into account that

Inditex has been impacted by adverse currency exposures (EUR against USD, CNY and

TRY) that dragged down its results by around 2-3% on sales in the past nine months.

The company is still showing healthier margins and higher growth rate than its peers:

EBIT margin NI margin Sales growth

Inditex 17.4% 13.1% 8.4%

H&M 9.6% 7.4% 2.6%

Fast Retailing 10.7% 6.7% 11.4%

Next 17.9% 13.8% 0.7%

Gap 8.8% 6.2% 2.4%

L Brands 12.4% 6.9% 3.5%

Average 11.9% 8.2% 4.1%

Source: IHS Markit.

Sustainability

We remain our high confidence in the long term based on:

Estimates are positive showing around 10% CAGR on sales despite the adverse

currency swings; on Q317 impacted negatively on sales by 2.6%. Inditex is

pushing its online sales which now represent around 2% of the overall revenues,

nonetheless this is expected to soar in the coming years (13% boost in online

sales during November and December of 2017).

It holds a significant stock of cash which could push further dividends in the next

years. Net cash position stood at €6b in Q317 (+24% year-on-year) which

covers approximately 3 years of dividend payments. Brokers’ estimates show

c.14% CAGR in net cash position for the next four years.

Dividend Forecasting

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Inditex shows healthy dividend growth driven by an increase in sales and

virtually unchanged operating margins. Some industry peers have reduced

payments (e.g. Next) and others have kept flat dividends despite dimmer

fundamentals: H&M’s current EBIT margin stands at 9.6% ─ down from 16.9%

in FY14 ─ whilst pushing the payout ratio from 80% in FY14 to the current

100%.

Conclusion

Ahead of the FY17 results presentation, which will be held on 14th March before market

opening, we consider Inditex to be able to keep pushing shareholder remuneration

further (+10% LFL estimated), supported by solid fundamentals. However, we also

highlight the potential upside for the next years from the current c.70% payout to

around 75-80% due to the estimated upward trend on sales and an increasing net cash

position.

Contacts:

Carlos Garcia-Lastra Marques

Senior Research Analyst II

Dividend Forecasting

+44 20 7786 5162

dividendsupport@ihsmarkit.com

For further information, please visit www.ihsmarkit.com

Dividend Forecasting

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