LONDON, (Reuters Breakingviews) - L’Oréal is saving up. The French cosmetics giant on Thursday reported like-for-like sales last year had risen by 7.1 percent – the fastest rate in over a decade. Demand was particularly strong in the Asia Pacific region, defying fears of cautious Chinese shoppers, and for high-end brands like Kiehl's and Yves Saint Laurent perfume. However, L’Oréal’s growing cash pile is less of an unnecessary indulgence than it might seem.

The company run by Jean-Paul Agon has succeeded in making expensive beauty products the norm. Sales of its Lancôme brand rose above 3 billion euros, equivalent to 94 million of its 32-euro mascara wands. L’Oréal’s operating margin expanded to a record 18.3 percent.

This is boosting the company’s financial appeal. Net cash at the end of December was 2.8 billion euros, up from 1.9 billion euros a year earlier. That pile looks set to keep expanding. Boosting the dividend by 8.5 percent to 3.85 euros a share means the company will distribute 2.2 billion euros to shareholders this year. But L’Oréal’s cash flow should comfortably exceed that.

The 121 billion-euro company does have its eye on one big splurge, however. L’Oréal has said it is ready to buy back the 23 percent shareholding in the company held by Nestlé. The Swiss giant is under pressure from activist investor Daniel Loeb to sell the stake.

Buying back the shares, worth 28 billion euros at Thursday’s closing price, would be a stretch. However, the cash on its balance sheet and its stake in drugmaker Sanofi, which isn’t a natural fit with cosmetics, already add up to 11.6 billion euros. It could finance the rest with debt, and then let cash flow replenish its reserves. L’Oréal has proved skilled at finding the latest cult consumer products destined for mass appeal. For shareholders, its cash management may prove equally alluring.

CONTEXT NEWS

- L’Oréal on Feb. 7 reported sales of 26.9 billion euros for 2018, up 3.5 percent on the previous year. On a like-for-like basis, excluding exchange-rate fluctuations, the French cosmetics group said sales grew by 7.1 percent, the fastest growth rate in more than a decade.

- Sales in the final quarter of 2018 were 7.1 billion euros, an organic growth rate of 7.7 percent.

- Its operating margin for the year expanded to 18.3 percent, which the company said was a new record, from 18 percent in 2017. The Asia Pacific region enjoyed the fastest growth, with like-for-like sales up 24.1 percent.

- Net cash flow was 3.9 billion euros, slightly lower than the previous year. Net cash was 2.8 billion euros, up from 1.9 billion euros at the end of the previous year.

- The board would propose a dividend of 3.85 euros per share, an increase of 8.5 percent.

- Swiss consumer giant Nestlé owns 23 percent of L’Oréal and is under pressure to sell it from activist investor Daniel Loeb, founder of hedge fund Third Point. L’Oréal has said it is ready to buy the stake.

- Earlier in the day L’Oréal shares closed down 0.5 percent at 216 euros.

(Editing by Peter Thal Larsen and Martin Langfield)

(( dasha.afanasieva@thomsonreuters.com ; Reuters Messaging: dasha.afanasieva. thomsonreuters.com@reuters.net ))

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