Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Before we can all start being ferried around in self-driving cars that communicate with each other and are powered by renewable electricity, someone has to pay to develop them -- shareholders. 

Daimler's earnings presentation on Thursday stressed that they'll benefit from that spending.

Daimler is feeling confident after the German car and truckmaker presented an exceptional earnings scorecard for 2015. Full-year revenue rose 15 percent to almost 150 billion euros. Net profit jumped 22 percent year-on-year.

In the days when the carmaker was turning out ugly saloons that appealed primarily to old men, profits like these were a pipe dream. But design chief Gorden Wagener has transformed the brand's image: these days its SUVs and saloons have an appealing, sporty design and customers are willing to pay a premium to purchase them.

To celebrate, Daimler hiked its dividend by a third to a record 3.25 euros a share - which equates to a yield of 5.4 percent.

Daimler's Premium Payout
Dividends have climbed as Mercedes-Benz's performance has improved
Bloomberg

So why did the shares fall more than 3 percent?

Part of the reason is that Daimler plans to splash a big chunk of its hard-earned cash on new models, technology and plants. A really big chunk. 

Spending on property, plant and equipment will rise 37 percent year-on-year to an average of 7 billion over the next two years. That increase, of about 2 billion euros, is far more than the 500 million-euro increase that Arndt Ellinghorst, analyst at Evercore ISI, was expecting. 

Meanwhile, R&D is forecast to jump 9 percent to an average of 7.2 billion euros in 2016 and 2017. Taken with property, plant and equipment, that amounts to more than 28 billion euros in spending.

And as a result, comparable free cash flow from the industrial businesses is expected to fall "significantly" in the 2016. Chief Executive Dieter Zetsche didn't specify how much, but no matter -- shareholders will be rewarded further down the road. 

Compared to German rivals, Daimler currently spends proportionately less on R&D. It spends 4.4 percent of revenue, compared to BMW's outlay of 5.7 percent of sales in 2014 and VW's 6.5 percent. So perhaps some additional outlays are justified.

Daimler Turns on the Taps
Capex spending is set to surge in the next two years
Daimler
2016/2017 is average forecast spending per year

The reasons to spend have grown in recent years. Cutting emissions (even more pressing in the wake of VW's dieselgate scandal), developing digital technologies and building self-driving vehicles are all expensive.

Providing sales continue to expand, Daimler can afford some largesse. And perhaps they might:  It expects a slight increase in revenue and Ebit from continuing operations in 2016 when Mercedes-Benz launches a new version of its  E-Class saloon, a perennial cash cow.

But will that be enough? 

As Gadfly has previously noted, Daimler is still doing fantastically well in China, where its Mercedes-Benz car sales rose 33 percent last year.

But last year's bumper sales partly reflect a "catch-up" phase following problems with Daimler's sales and distribution system that it has now overcome. Like its rivals Audi and BMW, Daimler will surely succumb to gravity in China one day.

Has Daimler Peaked?
CEO Zetsche told investors last July that the goods times were still ahead.

 

And the outlook isn't great in the world's largest economy, either. Car sales in the US, which have been fueled by cheap credit, look like they're peaking, and Daimler expects weakening demand for trucks to have a "significant impact" on the North American market.

With 18.6 billion euros in net cash Daimler looks like it has a nice cushion if markets to cope with some softening in its markets.

Nevertheless, Zetsche may yet come to rue his statement that investors who act "act under the assumption that we are peaking now will be very unhappy in a year, or two years, from now." Since he made that remark in July, Daimler's shares have fallen 28 percent.

Higher investments are set to weigh on Daimler's cash generation in the short-term, making his task more difficult. If Zetsche is going to deliver on his promise, that spending needs ultimately to pay off.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net