Volkswagen’s troubles sour Qatari investment

• Qatar owns 10% of Volkswagen
• VW share price at 14-year low
• Other dividends higher

Volkswagen’s shares have tumbled by more than two-thirds from a 2021 peak, slashing the value of Qatar’s stake in the German conglomerate, as shrinking margins, weakening sales and production overcapacity weigh on the troubled automaker’s bottom line.

Even with several billion dollars accrued in dividends since Qatar Holding invested in 2009, Volkswagen’s problems suggest the sovereign wealth fund subsidiary would have fared better putting its money elsewhere.

Qatar paid “in excess of” €7 billion for options that ultimately led it to acquire 10 percent of Volkswagen Group – including 17 percent voting rights – plus 10 percent of Porsche.

The complicated deal did not specify the price for the Volkswagen stake – Porsche had attempted a takeover of its larger rival and although that failed, the sports car company still holds 53.3 percent of Volkswagen’s voting shares. In 2013, Qatar sold its Porsche stake to the automaker’s family shareholders for an undisclosed amount.

Volkswagen’s subscribed capital is split into 295.1 million ordinary shares, which have voting rights, and 206.2 million preferred shares.

On Thursday, Volkswagen’s ordinary shares – the kind that Qatar owns – slid to a 14-year closing low of €91.50. The stock has fallen 72 percent from a March 2021 peak of €327.20, wiping €11.2 billion off the value of Qatar’s stake which is now worth €4.59 billion based on Thursday’s close, according to AGBI calculations.

Qatar received €3.29 billion in annual dividends from Volkswagen for the financial years 2009 to 2023, AGBI calculates. Based on its current price, Volkswagen provides a dividend yield of 9.8 percent, Yahoo Finance estimates.  

“Volkswagen’s dividend payout levels are slightly higher than the average of the auto sector, but there are European companies in other industries that offer a much better dividend yield,” says Adrien Brasey, equity research analyst at AlphaValue in Paris.

Considering the current value of its Volkswagen stake and these dividends, Qatar is likely to be in profit for its investment.

Yet its returns have been meagre compared with those if it had simply invested in a fund tracking the US S&P 500 index, for example. This benchmark is up 464 percent – a more than five-fold increase – since the date of Qatar’s Porsche-Volkswagen investment.

Qatar’s motivation to invest in Volkswagen is likely to go beyond simply seeking a financial return. Being a major shareholder in one of Europe’s most well-known companies conveys prestige, affords influence on the business and probably grants access to its technology, too.

Mansoor Al Mahmud, CEO of sovereign wealth fund the Qatar Investment Authority, and Hessa Al Jaber, Qatar’s former information and communications technology minister, are members of Volkswagen’s supervisory board.

Analysts' views

From an investment perspective, analysts have differing views on Volkswagen, which last Wednesday reported a 33 percent drop in nine-month net profit to €7.59 billion as costs rose and it took restructuring provisions.

“I have a quite bearish view on Volkswagen and wouldn't recommend investors to buy the stock right now,” says Brasey. AlphaValue has a price target of €90.3 and a “reduce” recommendation for Volkswagen’s preferred shares.

Warburg Research in Hamburg has a price target for Volkswagen’s preferred shares of €131 and a buy recommendation.

“At its current share price, three to four years of Volkswagen’s profits equates to its market capitalisation,” says Fabio Hölscher, an analyst at Warburg Research. “In normal years without this many one-offs, VW pays a high dividend in relation to its share price.”

An October 30 Volkswagen earnings statement warned: “Further intensification of competition in the automotive sector, expectations of falling margins and lower demand, particularly for electric vehicles … put a damper on the share price.”

Volkswagen forecasts full-year sales revenues are likely to slip 0.7 percent to €320 billion.

“There's still downside potential on Volkswagen, with potentially another profit warning in Q4,” says Brasey.

Volkswagen's nine-month profit was down from €11.35 billion a year earlier as costs rose and it took provisions. The latter includes €1.2 billion from Volkswagen’s closure of an Audi plant in Brussels and about €1 billion in other restructuring costs including a staff severance programme, says Hölscher.

The operating margin for its “core” business – its activities under the Volkswagen brand – was 2.1 percent in the first nine months of 2024.  The company aims to increase this to 6.5 percent by 2026, “which is ambitious when we look at its recent history,” says Hölscher, noting this margin was 3.6 and 4.1 percent in 2022 and 2023 respectively.

Volkswagen’s margins soared during the Covid-19 pandemic and its immediate aftermath as automakers pushed high-margin models, which also boosted free cash flows, Brasey says.

Margins and cash flows have now returned to pre-pandemic levels. 

“Some analysts had thought these higher margins were sustainable but recent earnings have shown they were not,” Brasey says.