Buy British or Buy American?

Parallels between the U.S. and the British economies have existed for decades. Both countries run large trade deficits and have citizens that borrow more than they save. The financial markets have represented a substantial part of each economy. It was as if New York and London were dual epicenters for the financial meltdowns last fall. Even the AIG bonus story that dominated the news in March was as much a British one as an American one, with many bonus recipients being based in London.

So as the financial markets begin to stabilize and investors consider buying back into individual stocks, it is a fair question whether you should buy American or buy British names. I can not predict whether the recent six week run up is a bear market rally or the start of something sustainable. I can say that there are some very great businesses whose stocks are on sale right now.

If you are compelled by today’s valuations, I would urge Americans to look as carefully at British stocks as they do their trusted blue chip names at home. The converse is also true for British investors. This applies to income investor looking for high yield out of stable telecom companies, to inflation minded investor looking to make a play on Big Oil, and to the speculative investor looking to profit from a financial basket-case company deemed too big to fail by its government.

Where there is a large cap name from one side of the Atlantic with a certain investment profile, there is often a sister stock headquartered “on the other side of the pond” that may be cheaper or more profitable, and thus, worth a look.

A comparison of the daily movements in the United States’ S&P500 index and Britain’s FTSE 100 shown above reveals a remarkable correlation for most of 2008. This held for the first 10 months of the year. The divergence began in early November, about the time that Gordon Brown announced plans to provide direct equity investments into U.K. banks. Then-Treasury Secretary Henry Paulson was forced to follow suit, redirecting the TARP in a similar direction. British policy (whether right or wrong) was now out in front, which presumably gave investors more confidence. The FTSE 100 finished down 31% for the year (compared to 38% for the S&P500) and became the best performing major index of the major economies.

The comparison of economic indicators between the U.S. and the U.K. reveals a mixed picture. Both economies contracted sharply in the fourth quarter of 2008 with the U.K. economy with declines outpacing that of the U.S. However, American unemployment has increased much faster pace in the recent months.

Economic Indicators	Q4 GDP Growth (YoY)	Latest Unemployment Figure	Latest Inflation Figure (CPI)
United States	-0.8%	8.5% (Mar.)	-0.1% (Mar.)
United Kingdom	-1.9%	6.5% (Feb.)	3.2% (Feb.)

The biggest difference between respective economic indicators is probably inflation. In the U.S. changes in consumer prices recently went negative (-0.1% for March), sparking fears of deflation. It was only last summer that the U.S. was looking at months when CPI was increasing as much as 5% year on year. The U.K. inflation numbers were equally high last year but now remain stubbornly above 3% (3.2% in Feb ’09). This difference is likely due to the rapid devaluation of the British Pound Sterling. Sterling has dropped more than 25% in value since last summer relative to the dollar (see chart below) but less than half as much relative to the Euro. This makes imports of commodities (often priced in U.S. dollars) more expensive but makes the U.K. export sector more competitive globally.

A good way to compare blue chip companies across the Atlantic that may be on sale now is by looking at the FT Global 500. The Financial Times publishes a list of 500 largest (by market capitalization) publically traded companies by headquarter country. The table below shows the ten largest in the order they ranked at the end of 2008. All these companies also trade in New York, mostly though American Depository Receipts (ADR). I have then provided data (from Morningstar) to show year-to-date return and the bounce from recent market lows. At the bottom, I have added three major banks that fell out of any top rankings last year but may be candidates for the more aggressive investor. All data is as of April 17, 2009.

Company Name - Top 10 British on FT Global 500	Ticker (in US)	Price $	Mkt. Cap ($ mil)	Return YTD %	Return from 52-WK low	Sector
Royal Dutch Shell PLC	RDS.A	42.96	131,495	-17.55	12.3%	Energy
BP PLC	BP	40.13	125,240	-12.37	19.1%	Energy
HSBC Holdings PLC	HBC	36.22	87,691	-24.26	58.2%	Financials
BHP Billiton PLC	BBL	42.05	117,519	11.79	99.7%	Materials
Vodafone Group PLC	VOD	19.3	102,527	-5.58	26.1%	Telecommunications
GlaxoSmithKline PLC	GSK	30.59	86,590	-16.78	12.7%	Health Care
Unilever PLC	UL	19.31	58,411	-16.12	13.9%	Consumer Staples
AstraZeneca PLC	AZN	35.09	50,759	-11.07	17.1%	Health Care
British American Tobacco PLC	BTI	46.54	47,110	-9.13	7.6%	Consumer Staples
BG Group PLC	BRGYY.PK	79.06	56,528	11.8	59.4%	Utilities
Financial Companies Outside of Top 10
Barclays PLC	BCS	13.32	21,761	35.92	384.4%	Financials
Royal Bank of Scotland Group PLC	RBS	9.82	8,124	-35.27	243.4%	Financials
Lloyds Banking Group PLC	LYG	6.21	8,768	-19.35	195.7%	Financials

The equivalent table for the U.S. market reveals a similar profile of companies:

Company Name - Top 10 American on FT Global 500	Ticker (in US)	Price $	Mkt. Cap ($ mil)	Return YTD %	Return from 52-WK low	Sector
ExxonMobil Corporation	XOM	66.75	329,854	-15.97	18.1%	Energy
Wal-Mart Stores, Inc.	WMT	50.2	196,539	-9.94	8.5%	Consumer Staples
Procter & Gamble Company	PG	51.66	151,407	-15.85	17.6%	Consumer Staples
Microsoft Corporation	MSFT	19.2	170,699	-0.52	29.1%	Information Technology
AT&T, Inc.	T	25.95	152,931	-6.09	24.2%	Telecommunications
Johnson & Johnson	JNJ	53.05	146,726	-10.59	14.7%	Health Care
General Electric Company	GE	12.39	130,844	-21.16	116.2%	Industrials
Chevron Corporation	CVX	66.01	132,321	-9.93	18.9%	Energy
Berkshire Hathaway Inc.	BRK.B	3,012	140,521	-6.29	34.4%	Financials
Pfizer Inc.	PFE	14.16	95,513	-18.29	21.9%	Health Care
Financial Companies Outside of Top 10
J.P. Morgan Chase & Co.	JPM	33.26	124,989	6.96	122.3%	Financials
Citigroup, Inc.	C	3.65	20,702	-45.46	276.3%	Financials
Bank of America Corporation	BAC	10.6	67,855	-24.51	319.0%	Financials

From here it is possible to pair off companies of similar profiles from the U.K. and the U.S. For example, if you were looking for that defensive telecom name and were considering an investment in AT&T (T), you should also consider Vodafone (VOD). Both companies have strong free cash flow to support healthy dividend payments yet Vodafone sports a slightly higher yield and trades at a discount to AT&T whether you look at forward P/E or P/B ratios. This is not to say that Vodafone has better prospects than AT&T. That is for you to judge. It is simply that, if you are considering one, you should consider the other also.

"High Yield Telecom Giant"	Ticker	Forward P/E	% Dividend Yield TTM	Price/ Book	Free Cash Flow TTM ($mil)
AT&T, Inc.	T	11.38	6.24	1.59	13,321.00
Vodafone Group PLC	VOD	7.69	7.01	0.94	14,545.82

For those that want to hedge inflation risk by investing in oil majors, BP (BP) and Royal Dutch Shell (RDS.A) provide nice compliments to ExxonMobil (XOM) and Chevron (CVX). Exxon is clearly the most profitable of the bunch but BP is the yield winner of the group and is cheaper on a forward P/E basis than Exxon or Chevron.

"A Way to Play Big Oil"	Ticker	Forward P/E	% Dividend Yield TTM	Return on Equity TTM
BP PLC	BP	8.27	8.3	29.45
ExxonMobil Corporation	XOM	11.4	2.4	38.53
Chevron Corporation	CVX	9.62	3.94	29.23
Royal Dutch Shell PLC	RDS.A	7.23	7.45	20.92

Many investors are still on the defensive and looking to only buy big names in consumer staples. Investors looking at Procter & Gamble (PG) should also look at Unilever (UL). Both have their strong points depending on you weight yield or P/E ratio higher in your measure of value. Also, both have great historical returns whether you look at return on assets (ROA) or return on equity (ROE).

"The Defensive Consumer Stock"	Ticker	Forward P/E	% Dividend Yield TTM	% ROA - 5 Year	% ROE - 5 Year
Procter & Gamble Company	PG	12.85	3.1	10.01	29.05
Unilever PLC	UL	13.23	5.17	9.4	44.61

Also for the defensive investor, there is the cash-rich drug company on the prowl for acquisitions to fuel growth. The U.S.’s Pfizer (PFE) will soon acquire Wyeth while GlaxoSmithKline (GSK) of the U.K. is using the downturn to add Stiefel Laboratories to its portfolio.

"Drugmaker Hunting for Acquisitions"	Ticker	Forward P/E	% Dividend Yield TTM	Free Cash Flow TTM ($mil)	% ROE - 5 Year
Pfizer Inc.	PFE	6.15	9.04	16,537	16.53
GlaxoSmithKline PLC	GSK	8.43	6.56	10,638	61.17

Lastly, there are three pairings of financials. Collectively, they are in the “Too Big to Fail” club. I admit I struggle to find the right financial metrics to measure value in these areas. Even today’s P/B ratios may be irrelevant depending on the ultimate quality of the bank balance sheets, how much of the future losses are shared by governments, and what shareholder dilution ultimately results when all is said and done. Nevertheless, it is interesting to see how similar these banks are. If you are going to going bottom fishing in one pond (U.S.), it might be worth a trip to the other (U.K.).

"The Last Bank Standing"	Ticker	Price/ Book	Return YTD %	Return from 52-WK low
J.P. Morgan Chase & Co.	JPM	0.93	6.96	122.3%
HSBC Holdings PLC	HBC	0.94	-12.37	19.1%

"The Almost Nationalized Global Bank"	Ticker	Price/ Book	Return YTD %	Return from 52-WK low
Royal Bank of Scotland Group (The) PLC	RBS	0.09	-35.27	243.4%
Citigroup, Inc.	C	0.29	-45.46	276.3%

"The Good Bank Buys a Bad Bank"	Ticker	Price/ Book	Return YTD %	Return from 52-WK low
Lloyds Banking Group PLC	LYG	0.93	-19.35	195.7%
Bank of America Corporation	BAC	0.49	-24.51	319.0%

With all the value traps out there today, investors should cast a wide net when trying to pick individual stocks. The many parallels between the U.S. and U.K. economies and blue chip stocks provide the global investor a good opportunity to take a wider view with little additional effort.

Disclosure: The author holds long positions in Lloyd’s Banking Group (LYG) and Johnson & Johnson (JNJ).

Comments

[lasewoof:]

Great article, very useful. I particularly like the short characterizaton of the banks. It was also interesting to note how the drug companies and defensive stocks haven't recovered as much and, in particular, how relatively Pfizer is on a p/e basis.

Apr 21 09:47 AM

[donzelion:]

The way I see it, when the pound collapsed last fall versus the dollar, fairly decent British companies went on sale for an additional 25% off. Since I lack any confidence in the USD long-term, getting a portion of my portfolio out of the country makes very good sense to me.

British equities are almost always more deeply integrated in their global operations than American companies (American companies try to avoid global taxation rules by incorporating in Britain - and then incorporating subsidiaries from the British subsidiary). While in theory, these separations are merely paper barriers, anyone who has been awake for the last 16 months might have learned that paper occasionally matters.

If you're looking for globalization to save the day, look to tightly integrated outfits like HSBC (JP Morgan is a fine bank, but where HSBC has integrated management staffs posted in nearly every member of the G20, JP Morgan normally has a couple of country representatives and no deep presence). Same principle applies with double strength for AT&T v. Vodafone.

In terms of BP v. XOM, I'd go with the dividend payer (esp. if the dollar is likely to decline relative to sterling).

As for other matchups, it's hard to pick a clear winner. There really is no British analogue to Wal-Mart - but Carrefour is an excellent European contender (which, it turns out, is also far more global than Wal-Mart, which is barely moving across N. America, let alone high-growth emerging markets).

Apr 21 09:56 AM

[Living4Divi...:]

Nice article

Jun 07 11:18 AM