Michelin rewards shareholders and further strengthens its balance sheet

This morning, the market reacted very positively to the French tyre maker's annual results.

It is true that they are better than expected, particularly since last October's panic attack that followed a reduction in the group's earnings guidance.

On that occasion, we noted that Michelin's valuation had sunk to an attractive support leved, i.e. a valuation below the value of its shareholders' equity - a traditional floor reached three times since the subprime crisis - with a dividend yield above 5%, a clear buy signal.

Even though enthusiasm should be tempered regarding the tyre maker's outlook, subject to a low-return reinvestment dynamic because it is trapped in an extremely competitive sector that squeezes its margins, we believe that investor pessimism at the time was largely excessive.

At the end of a gloomy year, the group is therefore delivering cash profit - or free cash flow - before acquisitions of around €2bn - more or less the same as last year. It should be kept in mind that the downturn in business supported cash generation through releases of working capital requirements.

The group faced serious headwinds in 2025: a 4.7% decline in volumes, admittedly fairly well absorbed by price increases; and an adverse currency effect linked to the dollar's fall, which cost it a significant €817m at current exchange rates.

A further dividend increase - which, it should be noted, has doubled in ten years and quadrupled in twenty years - and a share buyback program that is this time perfectly sequenced - since it was carried out at attractive valuations - leave Michelin with enough room to cut its net debt by €767m at the year-end.

The tyre maker thus remains capitalised in a remarkably robust and defensive manner, as its net debt represents less than half of its operating profit before depreciation, or EBITDA, and just over one year of free cash flow.

However, in the face of abundant and well-armed competition, its profitability has been stagnating since 2019. The string of acquisitions aimed at strengthening its technological innovation capacity and its brand image have so far had an essentially defensive character, rather than opening the way to new growth prospects.

Michelin's valuation is now less attractive than it was four months ago. A return of the share price to a multiple of 1.5x book value and a dividend yield between 3.5% and 4% - its historical average valuation - could be interpreted by some as a sell signal.