European Dividend Gems: Investor AB

Introduction to the European Dividend Gems series

Many dividend investors are focusing primarily on U.S. stocks. The so-called Dividend Aristocrats and Dividend Kings are very popular as they have built impressive track records of growing profits and dividends. The disadvantage of buying relatively popular companies is that it becomes harder to beat the market. I therefore try to find lesser-known stocks that have a long history of increasing financial results. The European stock markets are a good place to find such companies. There are many European companies with a track record similar to the U.S. Dividend Aristocrats, but they often have lower market caps, less analyst coverage, and/or less popularity among dividend investors. This offers opportunities for stock-pickers to outperform the index.

In this series, I will research a number of dividend gems from the European stock markets. This first article covers Investor AB (OTCPK:IVSXF), a Swedish holding company with a 100+ year track record of market-beating returns. I will discuss the business segments, financial performance, and dividend track record. Besides, I will explain why investors should put this company at the top of their watchlist.

Company Overview

Investor AB was founded in 1916 by the famous Wallenberg family. Back then the portfolio mainly consisted of shares in Atlas Diesel (Atlas Copco AB (OTCPK:ATLKY) today) and Skandinaviska Enskilda Banken AB (OTCPK:SVKEF). These companies are still part of the investment portfolio, highlighting the long-term focus of the company. Also, Investor AB is still partly owned and managed by the Wallenbergs, with Jacob Wallenberg and Marcus Wallenberg as chair and vice chair of the company.

Through ownership and board participation, Investor AB aims to create long-term value for each individual business. The total investment portfolio is divided into three business areas: Listed Companies, Patricia Industries, and Investments in EQT.

Listed Companies

Investor AB owns a significant minority stake in a number of listed companies with proven track records within the industrial, healthcare, technology, and financial services sectors.

The listed companies represented 70% of adjusted net asset value (or NAV) at the end of FY2022 with a total value of SEK 475.3bn. The value distribution of listed companies at December 31^st 2022 was as follows:

The investment portfolio comprises 14 listed companies with Atlas Copco, ABB Ltd. (ABB) and AstraZeneca PLC (AZN) representing more than half of listed companies adjusted asset value. Atlas Copco is well-known for its air compressor products, vacuum solutions, industrial tools, and assembly solutions. ABB is a leader in the electrification, motion, robotics, and process automation markets. AstraZeneca is a global biopharmaceutical company specialized in oncology. In general, the portfolio is pretty well diversified but the main focus lies on the industrial and engineering sector.

Another noticeable thing is that all holdings can be directly related to Sweden. For example, Atlas Copco has its main headquarters in Sweden, ABB was founded after a merger between the Swedish company Asea AB and the Swiss company Brown, Boveri & Cie, and AstraZeneca was established after a merger between the Swedish company Astra AB and British Zeneca Group PLC. The close connection to Swedish markets helps Investor AB to really know what they own and utilize their professional network to engage with the companies.

Patricia Industries

The investment and development activities in wholly-owned businesses are incorporated into the Patricia Industries segment. The ownership horizon of businesses is long term which means that reselling is not part of the strategy. All subsidiaries owned by Patricia Industries have boards with both independent directors from Investor AB’s network and professionals from a particular industry.

Patricia Industries represented 20% of adjusted NAV at the end of FY2022 with a total value of SEK 138.5bn. Combined sales of the subsidiaries amounted SEK 54.3bn and the EBITDA amounted SEK12.3bn, representing an overall EBITDA margin of 22.7%.

The value distribution the Patricia Industries subsidiaries at December 31^st 2022 was as follows:

With 43%, Mölnlycke is by far the largest portion of NAV for Patricia Industries. Mölnlycke is a healthcare company providing single-use products and solutions for wound management, improving surgical efficiency and safety, and preventing pressure injuries. Examples of products are: surgical gloves, procedure trays, staff clothing, Mepilex bandages, and Mepitel wound contact layers.

Mölnlycke also represents the majority of financial income from Patricia Industries: 36% of total subsidiary revenue and 41% of total EBITDA during FY2022. On top of that, the business is growing at a steady pace. Since FY2017, sales of Mölnlycke grew with a 7% CAGR and the EBITDA with a 6% CAGR. This indicates a slight margin decline, mainly attributable to temporary cost increases in the most recent fiscal year.

The main focus of Patricia Industries lies on healthcare as Laborie, Sarnova, Advanced Instruments, and Atlas Antibodies are also providers of specialized medical, clinical, and diagnostic products. Even Permobil and BraunAbility could be considered healthcare companies as they produce powered and manual wheelchairs and wheelchair-accessible vehicles, lifts, and seating. Personally, I like the focus on healthcare because Investor AB will benefit from secular trends in the sector such as increased healthcare penetration, digitalization, and automation.

Investments in EQT

Last but not least, Investor AB owns 17.5% of EQT AB (OTCPK:EQBBF), a manager of private equity and infrastructure funds. Furthermore, Investor AB has committed a significant amount of capital to EQT’s investment funds. The combination of investments into EQT AB and EQT funds totalled SEK 70.1bn at the end of FY2022, representing 10% of Investor AB’s adjusted NAV.

Investor AB’s investment philosophy

The long-term perspective of Investor AB really resonates with my personal investing strategy as I also intend to hold business for decades. From my perspective, Investor AB can be best compared to Warren Buffett’s and Charlie Munger’s Berkshire Hathaway Inc. (BRK.B). Their investment philosophy is also to buy companies and let them develop over a long period of time. Continuously buying and selling holdings during market cycles is not part of the key strategy. In terms of total return, both Investor AB and Berkshire Hathaway outperformed the S&P 500 index (SPY) by a wide margin over the past 20 years.

Let’s take a closer look at Investor AB’s investment philosophy. The reason why Investor AB has such a long time horizon for each holding is because management believes that their businesses are able to keep reinventing themselves. Vice chair Marcus Wallenberg stated that Sweden is highly dependent on innovation. The country only has just over 10 million inhabitants, so the only way to stay competitive in a continuously developing world is to be at the forefront of technology development.

It is therefore hardly surprising that Investor AB encourages its businesses to spend significant time and money on capturing new opportunities, R&D, up- and re-skilling, and talent management. Investor AB is often the largest shareholder in the listed companies, which enables them to influence the board composition and impact strategic decisions. Moreover, it holds a board position at all listed companies. For example, Marcus Wallenberg holds a board position at AstraZeneca, Jacob Wallenberg holds a board position at Nasdaq, Inc. (NDAQ), and Hans Stråberg and Johan Forssell are members of the Atlas Copco board.

The aim of the Wallenberg family is not to earn as much money as possible, but to fund education, research and research projects for the betterment of Sweden. The majority of Investor AB is owned by the Wallenberg Foundations, a collective name for the public and private foundations formed by the Wallenberg family or established in memory of family members. The Wallenberg Foundations receive money in the form of dividends paid out by Investor AB.

All in all, every stakeholder benefits from Investor AB’s long-term focus which makes this holding company an excellent way to play the development of Swedish businesses and research.

Financial history

The best way to measure the financial performance of holding companies like Investor AB is to look at NAV. In the following figure I plotted the adjusted NAV per share at the end of each fiscal over the past twenty years. Since FY2002, NAV per share has grown with a 12.6% CAGR which is well in the double-digits. Growth has not slowed down at all as the average annual growth rate was 14.4% since FY2012 and 11.8% since FY2017.

Growth in total company NAV is driven by all three underlying business segments. The market value of listed companies has grown with a 10.6% CAGR between FY2002 and FY2022. On top of that, dividends received through listed companies have grown with a 9.6% CAGR over the same period. Patricia Industries was established in 2015 so we do not have 20-year data for that segment. Since FY2015, the EBITDA of this segment has grown from SEK 4.9bn to SEK 12.3bn representing a 14.1% CAGR. The combination of investments into EQT AB and EQT funds has grown from SEK 4.5bn in FY2002 to SEK 70.1bn in FY2022 representing a 14.7% CAGR.

So why has Investor AB been doing so well? I believe that the Wallenberg family plays a key role in the long-term outperformance. A Credit Suisse report from 2018 showed that family-owned companies often have faster growth metrics, superior margins, and more conservative balance sheets compared to non-family owned companies, resulting in stronger shareholder returns. According to Credit Suisse, this can be mainly explained by the longer time horizon adopted in decision-making and greater focus on R&D. Investor AB checks both of these boxes. With the sixth generation of Wallenbergs taking active interest in the business, I believe that Investor AB will continue to perform very well in the foreseeable future.

In the shorter term, there are plenty of opportunities to make new investments as the net debt ratio (net debt divided by total adjusted assets) has decreased to a multi-year low of 1.5%.

Dividend track record

Investor AB is a true dividend gem. One of the company’s strategic priorities is to pay a steadily rising dividend, supported by cash flows from all three business segments.

The majority of Investor AB’s dividend is covered by dividends received through listed companies. During 2022 Investor AB paid a total of SEK 12.3bn in dividends (or SEK 4.00 per share), while it received SEK 10.9bn in dividends through listed companies. The remainder of the dividend is covered by proceeds and distributions from the other business segments. Given the ongoing growth of listed companies, subsidiaries, and investments in EQT, Investor AB’s dividend is definitely safe.

Over the years, the company has built an impressive track record of increasing dividends. The next graph shows the dividend per share over the last twenty years. It is true that the dividend was lowered in some years with tougher economic conditions. This is fine for me as during these periods there are plenty of opportunities to spend capital on new investments. Also, shortly after a dividend cut Investor AB starts to increase the dividend again in the following years. Between 2002 and 2022, the dividend has grown with a 8.7% CAGR. This growth rate will be sustainable in the future if Investor AB’s holdings continue to perform well.

For 2023, the dividend per share will be increased with 10% to SEK 4.40. This offers a 2.1% starting yield at the current share price.

Valuation

The best way to value Investor AB is to consider the NAV. Holding companies often trade at a discount to NAV which could have several reasons. For example, the exact value of subsidiaries from Patricia Industries is not known because they are not publicly traded. Investor AB makes an estimation for the value of every subsidiary by assuming a certain EV/EBITDA ratio.

I have plotted the NAV per share, share price (left y-axis), and discount to NAV (right y-axis) for the last twenty years (see figure below). While there has always been a discount, the discount has significantly decreased in recent fiscal years. If you consider the 2002-2012 period the average discount to NAV amounted 28.3%, while this decreased to 17.9% for the 2012-2022 period. This could have a number of reasons. For example, the current annual reports include more detailed data about all holdings compared to twenty years ago, providing more transparency to investors.

I would be willing to buy Investor AB shares at a 20% discount to NAV. Since year-end 2022, NAV has probably increased as global markets rallied in January. The OMX Stockholm 30 Index (OMX:IND) increased with 10.5% YTD. Assuming Investor AB’s holdings increased at the same rate, I estimate that the current NAV is roughly SEK 245 per share. Applying a 20% discount rate results in a fair value of approximately SEK 195 per share. Note that this fair value will fluctuate with the change in NAV.

Risks to consider

Holding shares of Investor AB comes with some risks. The following two risks are applicable to any holding company, but they are still important to consider.

1. Despite the increasing transparency in annual reports, it remains hard to value and assess the financial condition of each individual subsidiary. You have to trust management that they provide an accurate valuation. Of course, Investor AB has a long and proven track record, but that does not fully eliminate this risk.
2. You also need to trust management to make the right investment decisions for the portfolio and strategic decisions for Investor AB’s subsidiaries. The reason to invest in Investor AB is because you think that their portfolio will outperform the benchmark indices. Just like the previous risk, trust in management is key.

Final thoughts

For some reason, Investor AB has never been on my radar while I have followed the European indices for years. I am really wondering why, because this holding company has such an impressive history and a portfolio which is poised to outperform the indices. Maybe, holding companies just never really appealed to me. My perspective has definitely changed after researching Investor AB and the fact that the Wallenberg family is still in charge plays an important role. The long term focus and strong emphasis on innovation make Investor AB an excellent way to benefit from the technological development of Sweden. The healthy balance sheet gives ample opportunities to keep expanding the portfolio with great businesses.

While the main focus lies on total returns, Investor AB could be a great stock for dividend investors. Buying shares at SEK 195 gives a 2.25% starting yield for 2023. I expect the dividend to grow at the same rate as earnings of underlying businesses which is probably in the high-single-digit to low-double-digit range. Assuming a dividend growth rate of 9% would give a yield on cost of 5.3% in ten years and 12.6% in twenty years.

For now, I rate this stock a ‘hold’ and recommend to wait for a pullback before initiating a first position or adding more shares.

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.