Philips to return €1.5bn to shareholders

Philips raised most of its financial targets and announced plans to return €1.5 billion to shareholders, saying it would reap the benefits of a two-year revamp to focus on healthcare, lighting and consumer appliances.

However, the Dutch group warned of tough conditions in many of its markets and the new goals fell short of some analysts’ hopes, sending its shares lower in early trading this morning.

"(The) new targets appear a little conservative," Morgan Stanley analysts said in a research note, adding there had been hopes for a share buyback closer to €2 billion.

Over the past two years, Philips has sold off much of its consumer electronics business - divesting its television, audio and video operations where it was struggling to compete with lower-cost Asian manufacturers, to focus on more profitable home appliances such as soup mixers and electric toothbrushes, as well as lighting for homes and offices, and healthcare.

Healthcare has become a particularly important market, with demand for new ultrasound and scanning products helping it to become the leading medical equipment supplier in the United States and a top-three producer of hospital equipment worldwide.

The group this morning said it was targeting a margin of 11-12 per cent on earnings before interest, tax and amortisation (Ebita) for 2014-2016, compared with the 10-12 per cent it is aiming for this financial year.

It is also targeting a return on invested capital of at least 14 per cent, compared with this year’s 12-14 per cent.

“We see substantial opportunities for profitable growth for 2016 and beyond,” chief executive Frans van Houten said.

However, the group also kept its sales growth target of 4-6 per cent unchanged and said it was feeling the impact of uncertainty over healthcare spending and reforms in the United States, weak economies and construction markets in Europe, as well as currency volatility in Japan, India and Indonesia.

“We can achieve the 2013 targets,” Mr van Houten told journalists on a conference call. “It’s hard work and we have a lot to do in the fourth quarter.”

JP Morgan analysts said investors remained to be convinced Philips can deliver double-digit percentage growth in margins.

“Given investor skepticism on Philips, quarterly execution is more important than setting targets,” they said in a note.

At 08.55 GMT, Philips shares were down 1.5 per cent at €24.54. They hit €25.48 earlier this month, the highest since the second quarter of 2010, and are up 25 per cent so far in 2013.

The stock trades at 14.9 times forecast earnings, a 15 per cent premium to the average of its peers including Electrolux , Alstom and Osram Licht, according to StarMine SmartEstimates.

Philips said it would buy back €1.5 billion of shares over the next two to three years, starting in October.

The group, which makes more than 40 per cent of its sales and 70 per cent of its EBITA from healthcare, set an EBITA margin target for that business of 16-17 per cent.

It is aiming for an EBITA margin of 9-11 per cent in lighting and 11-13 per cent in its consumer division.

Reuters