At a market cap of HK$25 billion, Samsonite is the world’s biggest luggage maker. According to Euromonitor, Samsonite, together with its sister brand, Tumi has around 20% market share in the luxury luggage market, with LVMH at 13% (including Rimowa).
Buying Tumi back in 2016 helped Samsonite give a meaningful presence in the premium luggage market.
Now, Samsonite is the kind of company the financial industry likes. It’s a well-known consumer brand with a dominant presence in its own market.
To put things in context, Samsonite is an American company, having founded in 1910 in Denver, Colorado. The luggage giant was made famous for its tapered vulcanized fibre suitcase, which is made from special layers of special paper that made the suitcase light and strong. The luggage giant was later on listed in the Hong Kong Stock Exchange in June 2011.
Would I buy Samsonite at 4.3% dividends?
At one point, shares fell over 80% between 2018 and 2020.
Since then, it has already more than tripled its share price.
Shares were down in the dumps because of tariffs on China’s luggage imports, a short seller research report on the company, and the COVID-19 pandemic.
While Samsonite’s business was clearly disrupted by the pandemic, its financial health quickly recovered after the world re-opened.
Shares traded close to HK$40 per share at its peak.
With shares trading at HK$18, is this a good buy (and for dividends) today?
Samsonite has strong pricing power that drives dividends
Since 2014, Samsonite has grown its revenues from HK$2.3 billion in 2014 to HK$3.6 billion in 2023. Because of its strong branding and ability to maintain pricing power, it has averaged a gross margin of 54% over the last ten years, which is impressive for a consumer brand.
What’s more, other than 2020, it has produced positive free cash flow year after year, driven by its economic moat from its reputable luggage brands.
Here’s another reason to be bullish. Samsonite has gradually built a massive distribution network, well over 1,000 directly operated stores and access to almost 50,000 third-party distributors. Over the past years, Samsonite could reach out easily to its target customers this way.
On one hand, Samsonite has been a favourite for the financial industry. Since its listing in Hong Kong, it has done a lot of deals and started buying other companies, including Hartmann, Tumi, and an outdoor brand, called Gregory Mountain Products from Black Diamond. It has paid lots of fees to investment bankers.
On the other hand, its wide portfolio of brands fortifies its dominance in the luggage space – appealing to consumers across different affluence.
During its latest financial results, revenues, grew 2.8%, while its net profits grew 16% on the back of a strong travel recovery. And it feels almost like a perfect business.
What I’m concerned with Samsonite
Despite its unique competitive advantage and heavy acquisition over the years have made Samsonite burdened with debt.
In its latest financial results, it has HK$1.8 billion of debt (see red), which is more than its HK$1.5 billion equity (see green). This puts its debt-to-equity ratio at 117%, which in my view, should be watched closely for. This was a result of buying too many companies to expand its global presence.
What’s also crucial was, Samsonite went bankrupt before during the global financial crisis in 2009, when it was called, The Samsonite Company.
But this is not a big problem Samsonite faces today.
What does Wall Street knows, that most investors don’t (got to do with dividends)
You see, what most investors may not know is Samsonite has been owned by many private equity firms before. Let me explain.
In 1986, Samsonite was sold to Kohlberg Kravis Roberts (KKR), a private equity giant. Later on, Samsonite went through many ownership changes. In 2005, the company was acquired by Marcello Bottoli, former CEO of Louis Vuitton, who bought Samsonite in 2005. But Bottoli left the company in 2009.
Then, in July 2007, private equity firm CVC Capital Partners took over Samsonite for $1.7 billion. CVC Capital Partners Ltd. became Samsonite’s fifth owner in 21 years.
At first glance this seems like a good thing. But if you don’t understand market dynamics at work, such companies are usually abused by their financial investors: taking on more debt, forced to buy more unnecessary companies and subjected to a huge change in corporate culture.
More crucially, shares of such stocks tend to trade at more volatile levels. That’s why you see Samsonite shares have an enormous whipsaw effect.
What I don’t like about financial investors is they can force management to cut dividends at will. This is bad news for dividend investors like myself.
Put it this way, since 2013, Samsonite has steadily grown dividends from HK$0.26 per share to HK0.68 per share in 2019.
It cut dividends immediately after it ran into trouble (see below). Shares stumbled. But recovered later on.
That’s the big issue with Samsonite, even though it’s a huge luggage player – an economic crisis could topple its ability to reward shareholders.
My final thoughts
Paying consistent dividends is a hallmark of business excellence. Samsonite’s growing dividends before 2018 has been a great indicator of its economic moat. And I think its current dividend yield could continue to grow.
But the problem seems to be it can’t get rid of the issue with financial investors, which will try to get the company to take on decisions that’s not aligned with retail investors like us. The company is forced to pile on more debt, expand too fast and these investors would try to squeeze more profits and cut staff.
While it could start paying dividends today, the moment it runs into a crisis, management will cut dividends, and that could painfully send the shares heading down. This can be emotionally nerve wrecking for the long-term dividend investor. And might not be that great for investors
Having said that, Samsonite’s business is still fundamentally sound and in a strong economy, especially when travel has returned, it could be riding on its next tailwind. At 4.3% yield and a low 7x P/E valuation, this seems to be a recovering dividend grower. If you can look past its history with private equity investors, past bankruptcy and growing debt burden, this could be something worthy for investors.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
