Dividend tuning

Roaring Daimler can rival BMW in investor rewards

Daimler's radical renewal of its model range is paying off. The carmaker reported record sales, rising profit margins and ample cash generation in the first quarter. The success calls for yet another major re-engineering project: of the payout policy for shareholders.

Mercedes' operating margins are approaching double-digit territory. The group sits on a cash pile of euro 20.5 billion and is on course to generate up to euro 5 billion in additional free cash this year. Moreover, it is sitting on several billion euros from divestments of assets considered non-core, including a stake in aircraft maker Airbus.

Daimler offered a 9 per cent dividend increase last year, but it can afford more. At 38 per cent of earnings per share, the payout ratio is still a little below its own commitment of 40 per cent. And that target may be low for a company that is leaner and better focused. Global strength leaves it less exposed to the vagaries of regional car demand.

A fundamental review of payout policy is in order, starting with a clear statement of how much net liquidity is needed for the industrial business. Evercore ISI estimates that euro 8 to 10 billion are enough to safeguard the group's investment grade credit rating and to hedge against cyclical swings. Add a couple of billion to top up pension funds and there is still at least euro 6 billion - more than twice Daimler's 2014 total dividends - left for buybacks or special dividends.

German rival BMW, whose product policy and profitability has long been Daimler's envy, can yet again serve as a role model, even though it is paying out 32 per cent of earnings in dividends this year. The Munich-based company has already signalled it is mulling a special dividend in 2016.

BMW is still ahead in pleasing shareholders. It has provided a total return of 246 per cent over the last five years, outpacing Daimler's 194 per cent, Thomson Reuters data shows. Daimler is catching up with BMW quickly in operating and financial performance. A more generous, predictable and sustainable payout policy could leapfrog its arch-rival in shareholder-friendliness.