- The S&P 500 has outperformed the broad European market in the past year.
- The Stoxx Europe 600 is cheaper than the S&P 500.
- High-yielding European large caps are alternative investments to U.S. stocks.
- Investment in stocks outside the U.S. helps to diversify a portfolio.
Two weeks ago, the Dow Jones Industrial has closed above 17,000 for the first time, and the broader S&P 500 is approaching the 2,000 mark. With a price earnings ratio of 19.6, the S&P 500 has become somewhat expensive. Investors should consider if they are willing to buy certain stocks at the current level as there are attractive alternatives in the Old World. Last November, the Wall Street Journal compared the S&P 500 and the broader European market index, the Stoxx Europe 600. At that time, the price earnings ratio of the S&P 500 was already 1.7 points higher compared to its European counterpart. Since then the S&P 500 has gained an additional 10%, whereas the Euro Stoxx 600 is only up by 5%, increasing the spread even further.
In the following article I will give an overview on 10 stocks from various sectors and from different European countries within and outside the Euro zone. All of them are large caps with a market capitalization of at least $30B, and each one can be considered as an alternative to well-known U.S. blue chips from the same sector. No share has a dividend yield of less than 3% which make these stocks particularly appealing for income investors.
Source: Company websites, 4-traders.com.
BASF (OTCQX:BASFY) is the world's largest chemical company with revenues of €74.0B ($97.7B), net earnings of €5.2B ($7.0B) in 2013 and a market capitalization of $106B. The corporation is a constituent of the German DAX, as well as the EuroStoxx 50. BASF yields 3.2% and has a PE (2014e) of 14.9 and a PE (2015e) of 13.9. The company is a classical chemical conglomerate, similar to Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD), although the latter ones are moving away from their chemical roots. BASF's portfolio is complex and highly diverse; the largest business segments are still the traditional chemically-based: Functional Materials & Solutions, Performance Materials, and Chemicals. In these areas, BASF can play off one of its core strengths: the so called "Verbund", a production network at major sites starting with the cracker and continuing with the production of base chemicals which are supplied to further downstream plants on-site. In this way, the output of each plant is utilized to the maximum extent possible, and ideally the waste streams of one plant serve as the feedstock of an adjacent one. Nevertheless, BASF has also divested more and more of its commodity type businesses over the course of the years, the most recent one being the sale of its participation in the polystyrene joint venture Styrolution. The goal is to focus more on solution oriented and specialty products with higher margins. The most profitable BASF segment in absolute terms remains its Oil & Gas business which is active in the exploration and production of oil and natural gas in Europe, North Africa, the Middle East, and Russia. The Agricultural Solutions segment delivers the highest profit margin in BASF's portfolio. It is already a leading player in the agrochemicals markets and its investments in biotechnology should start to pay off soon, for example with the launch of the first drought tolerant corn which has been developed in co-operation with Monsanto (NYSE:MON). BASF has performed quite well in the more challenging business environment of the past year and has been able to grow EPS in 2013 as well as in the first quarter of 2014. With the "We create chemistry" strategy for the year 2020, BASF aims at growing sales by 50% and increasing EBITDA by 100% in comparison to the 2011 baseline, a goal which is demanding, but not unlikely to reach, given the past achievements.
In summary, BASF is a solid conservative core holding for each portfolio which has been continuously successful in delivering shareholder value.
British American Tobacco, BAT (NYSEMKT:BTI) is the world's second largest tobacco company by market capitalization ($115B) and a constituent of the U.K.'s FTSE 100. The company also holds a 42% stake in Reynolds American (NYSE:RAI) which has just announced that it will take over Lorillard (NYSE:LO). As the major stakeholder, BAT has to approve the terms of the merger, including the upcoming brand divestments. BAT's five global brands are Dunhill, Kent, Lucky Strike, Pall Mall, and Rothmans. In 2013, the company reported a slight revenue growth of £70M to £15.3B ($23.9B) and a 3% rise in net profits as well as in free cash flow. This could be achieved thanks to higher prices and an improved operating margin despite declining cigarette volumes and currency headwinds. Asia Pacific and Eastern Europe, Middle East & Africa are the two largest regions for BAT, representing 54% of its revenue. In total, 71% of the sales volume is generated in developing markets vs. only 29% in the developed. For example, BAT holds a market share of close to 80% in India, the world's second most populated country, and in Brazil, the most important Latin American market. The stock is an alternative to American tobacco companies and given the internationality of its business, BAT is more comparable to Philipp Morris (NYSE:PM) and not to Altria (NYSE:MO). The focus on emerging markets is principally an advantage for tobacco companies as these are the only regions where cigarette consumption grows, but it bears the danger of currency fluctuations. BAT is currently valued at a PE of 17.1 for 2014 and 15.7 for 2015 and yields 4.0%. In the past five years, BAT has raised dividends in line with the EPS increase and has kept the payout ratio constant at 65-66%. It can be expected that the company will maintain this practice and that future dividend rises will continue to reflect the company's EPS growth. Tobacco companies are generally favored by investors because they generate massive cash flows which are used for generous dividend distributions and share buybacks which in return grow EPS further. BAT has started repurchasing shares in 2011 and has spent £1.5B in 2013 which corresponds to approximately 2% of its shares. A new buyback program in the same extent has been approved for the year 2014.
BAT is a good alternative to other international tobacco stocks. With its stake in RAI, it is involved in the American tobacco industry which will become even more important after the acquisition of Lorillard.
Four years after the Deepwater Horizon oil spill in the Gulf of Mexico, BP (NYSE:BP) has not been able to fully recover from the consequences of the environmental disaster, although the worst seems to be over. The company has cut dividends and sold assets to fund the Deepwater Horizon Oil Spill Trust with more than $40B to pay for claims. However, the uncertainty regarding future payments still clouds the share's outlook, and the stock trades below the levels it had reached before the spill. Despite these experiences and in comparison to its peers Exxon (NYSE:XOM) and Chevron (NYSE:CVX), BP continues to concentrate more on deep-water resources. In that sense, BP is a good completion as it focuses on different unconventional resources than its competitors. Further more, BP has a strong presence in Russia via its 20% participation in Rosneft (OTC:OJSCY). Although Russia currently does not seem the best place to be and the political uncertainties cannot be neglected, neither can Russia's huge oil and gas resources and its importance as a global oil and gas producer. In the past years, BP has divested assets in the upstream and downstream area for $38B and plans further disposals for $10B until 2015. The trigger for this process has of course been to fund the payments related to the oil spill, but it also helps to keep focus on the company's higher profitable operations. BP reported revenues of $379.1B in 2013 and net profits of $23.8B. Operating cash-flow for 2014 is expected to grow versus 2013 because of the extension of high margin production, the continued ramp-up of 6 major upstream projects, and 3 further major projects are expected to come on-stream later this year. With the help of the new operations, the perspective to grow production again remains intact. Nevertheless, BP focuses on capital discipline and plans to keep capital expenditures stable at $24B to $26B annually until 2018. The results which were reported for the first quarter 2014 indicate that BP is on track to achieve its goals. The first priority with respect to returning capital to shareholders as dividend growth, currently the stock yields 4.5%, paralleled by share buybacks which are mainly funded by the proceeds of the divestures. BP is a constituent of the FTSE 100 and has a market capitalization of $159B, at modest earnings multiples of 10.9 for 2014 and 10.2 for 2015.
For investors who are not see an imminent danger from the ongoing oil spill litigation, BP offers a lower valuation and a higher dividend yield than its industry peers.
Daimler (OTCPK:DDAIF) is the second largest German automaker by revenue after Volkswagen (OTCQX:VLKAY) and well known for its premium car brand Mercedes Benz, which represents 54% of the company's 2013 turnover of €118.0B ($155.8B). In addition, Daimler manufactures trucks, vans, and buses. The corporation with a market capitalization of $98B is a constituent of both the German DAX and the EuroStoxx 50. Given the fact that Mercedes Benz serves the premium segment of the automotive market, in can only be partly compared with the U.S. volume manufacturers Ford Motor Company (NYSE:F) and General Motors (NYSE:GM). Fortunately for investors looking for buying opportunities, the share does not carry a premium price tag and is valued at a PE (2014e) of 10.6 and 10.0 for 2015. This is similar to what is expected from F and GM in these years and the dividend yield of 3.3% is higher. Like any of the German automakers and with expenditures in excess of €5B annually, Daimler invests heavily in R&D, as innovation is one of the key success factors in the premium car segment. In comparison to the two major German premium car brands Audi (OTCPK:AUDVF) and BMW (OTCPK:BAMXY), Mercedes Benz has been lagging behind in the past years, but there are signs that the company is back on track again. In 2013, Mercedes Benz Cars sold 1.565 million units, a new record and 8% more compared to the previous year. With the introduction of the new S and E classes in 2013 and a completely new C class, which started at the beginning of 2014 in Europe, Mercedes has renewed its most important models. In addition, several new niche models, addressing the coupe and SUV segments, will be launched in the next years. All these efforts are paying off, as the number of cars sold in the first half of 2014 increased by 13%. Particularly important is Daimler's recent success in China, a market where Mercedes Benz had been underrepresented and where sales rose by 38% from January to June 2014. The 2013 net profit of €8.7B has been the highest in Daimler's history and the full positive impact of the model initiatives should be seen in 2015 when all the new models are globally available.
Daimler has learned its lesson from the past and has the potential to catch up further, particularly in growing markets like China which drive the global demand for premium vehicles.
Hennes & Mauritz, H&M (OTCPK: OTCPK:OTCPK:HNNMY) is a Swedish apparel retailer, the world's largest by revenue and can be compared with GAP (NYSE:GPS). The company is an ongoing growth story and has the target to increase the number of stores by 10 to 15% each year while growing sales in a similar range. In parallel, H&M is expanding its presence in the online market and has introduced new brand and store concepts in the recent years. H&M opened its first store in Sweden in 1947 and has seen the first major expansion wave during the 90's when it penetrated all important European markets. The expansion continued globally and significant milestones marked the opening of the first stores in the U.S. in 2000 and in China in 2007. At the end of its FY 2013, H&M was present with 3,132 stores in 53 markets. New countries on the 2014 and 2015 agenda are Australia, India, and South Africa. In terms of sales, Germany is H&M's largest single market, followed by the U.S., and France. In 2013, the company generated sales excluding VAT of SEK 128.6B ($14.9B), a 6% increase and net profits of SEK 17.2B ($2.0B). The class A shares, which are not listed, represent the majority of the votes are held by the family of H&M's founder, which guarantees stability and the continuance of the long-term growth strategy. As a result of the past years' almost exponential expansion and significant investments - the number of stores added increased from 18 in 2003 to 53 in 2013, the company's operating margin declined from 22.7% in 2010 to 17.2% in 2013. The year 2014 has started quite well for H&M with an increase of net profit by 19% in the first half. The company has always been able to fund the strong growth with its own financial resources, H&M is free of debt and holds a cash position of $2.0B. The company's market capitalization stands at $69B and it yields 3.3%. With an expected PE of 23.8 for 2014 and 21.3 for 2015 the share is not cheap, but fairly valued for a growth stock.
H&M is a financially rock solid income stock which is still controlled by the founding family with a long-term growth aspiration and not a slave to the stock market's quarterly earnings rush.
Munich Re (OTCPK:MURGY) is the stock which currently offers the highest dividend yield (4.5%) of the German DAX. With a market capitalization of $38B, the share is also a constituent of the EuroStoxx 50. Munich Re is the world's leading reinsurance company by premiums and its subsidiary ERGO, the group's primary insurance arm, is the second largest in Germany. The company's 2013 total premiums amounted to €51.1B ($67.5B) and net profit stood at €3.3B ($4.4B). The essential part of the business is the reinsurance arm which accounts for 54% of the recorded premiums. Major claims, primarily because of natural disasters have a significant impact on its result if they occur. That happened in 2011 when Munich Re had to cope with the largest claims from natural disasters in its history and which lead to a loss ratio of 114% in the reinsurance business and a weak overall result for the company. Consequently, future earnings are difficult to predict - in good years, profit will excel and in poor years with many claims, the result will be lower than expected. In any case, the primary insurance arm functions as an offset to absorb fluctuations in the reinsurance business. Due to the very satisfying earnings situation in good years, the company has been able to maintain stable dividend payments also in bad years. This is supported by a low payout ratio in the range of only 40%. Excess cash is returned to shareholders in the form of buybacks, and since 2006 Munich Re repurchased shares for overall €7B. In 2013, the company recorded record EPS of €18.50 which translate to a PE of only 8.7. Since January 2010, Warren Buffett is the largest single shareholder of Munich Re and holds 11.2% of the capital stock. Munich Re is also among the 15 largest stock investments of Berkshire Hathaway (NYSE:BRK.A), which further owns General Reinsurance Corporation, Gen Re, which was acquired in 1998 already.
Recognized by Warren Buffett, Munich Re has the highest dividend yield and is one of the cheapest stocks of the German Dax.
Nestle (OTCPK:NSRGY) focuses primarily on food & beverages and is the largest consumer goods company worldwide by turnover (CHF 92.2B or $99.4B in 2013). It is also highly profitable with net earnings of CHF 10.B ($10.8B). Nestle also holds a major participation in L'Oreal (OTCPK:LRLCY) (France), the largest cosmetic company. Besides the food & beverage categories which account for 88% of the company's revenue, 12% comes from the very profitable pet care segment. Recently, Nestle started expanding into the area of medical skin care with a newly formed unit called Nestle Skin Care which is based on Galderma, a former joint venture between L'Oreal and Nestle. This is part of the company's strategic direction to become the leader in Nutrition, Health and Wellness. Another step has been the creation of Nestle Health Science in 2011 which focuses on functional foods, food supplements and special food for particular medical conditions. All in all, Nestle is aiming expanding the boundaries of a conventional food company, aiming at higher value and premium margins. Being globally present, 44% of the company's revenue is generated in the Americas, 28% in Europe, and 28% in Asia. Nestle is a constituent of the largest Swiss index, the Swiss Market Index (SMI) and the one with the highest market capitalization ($250B). With a forward PE close to 19, Nestle is priced in line with other large consumer goods companies and has a dividend yield of 3.1%.
Nestle has been a successful creator of shareholder value for many years and is one of the global key holdings among consumer goods companies.
Syngenta (OTCQB:SYENF) is the second Swiss company on the list and a member of SMI as well. Being much smaller than Nestle, it has a market capitalization of only $34B. Based on the 2014(e) and 2015(e) EPS, the price earnings ratios stand at 18.7 and 16.0 and the dividend yield is 3.1%. Syngenta is the largest agrochemical company worldwide and ranks number three in the global seed market. A more detailed overview on the company can be found in this article. Syngenta's counterparts in the U.S. are the other major players in the agrochemical and seed industry: Monsanto, Dow Agrosciences (as part of Dow Chemical), and DuPont Crop Protection/Pioneer. In 2013, Syngenta generated $14.7B revenue ($11.5B in Crop Protection, including Lawn & Garden and $3.2B in Seeds), which resulted in a net profit if $1.6B. Both, the agrochemical and the seed market are expected to continue to grow above GDP for the foreseeable future, driven by the growing world population and the rising standard of living in emerging countries. Syngenta has gained the no. 1 position in the agrochemical market and it remains well positioned with a strong product portfolio and a promising product pipeline. In addition, the company has been able to grow its seed business even faster and more importantly has increased its profitability over the years.
As the leading agrochemical company, Syngenta is a solid long-term investment and a good choice for investors to participate in the megatrend agriculture.
Unilever (NYSE:UL) is the world's third largest consumer goods company by turnover. The shares are dual-listed as Unilever NV (NYSE:UN), a member of the EuroStoxx 50, and Unilever PLC ((NYSE:UL)), which is part of the FTSE 100, and have a combined market capitalization of $133B. Further information on Unilever can be found here. The company has increased dividends by 7% annually in the past seven years and currently yields 3.50%. In 2013, it reported revenues of €49.8B ($65.7B) and a net profit of €5.3B ($6.9B). Unilever has a higher exposure to developing markets than other major consumer goods companies. Therefore, the last quarters' results have been more negatively impacted by currency headwinds, nevertheless the underlying growth has remained strong and Unilever has reported solid results. For 2014, analysts expect slightly lower EPS compared to 2013 which is again attributed to currency effects. Nevertheless, Unilever has mastered the first quarter of 2014 better than expected and could be able to surprise again positively in the following quarters, particularly as major currencies show signs of recovery. Unilever already generates 57% of its turnover in emerging markets vs. only 43% in the developed countries which is significantly higher compared to for example Procter & Gamble (NYSE:PG) with only 39% developing market revenue. Unilever's portfolio is well diversified; food & beverages represent 46% of its sales, followed by the personal care segment (36%), and homecare (18%). Unilever has been improving its profitability over the course of the years and has sold non-core assets and less profitable brands. The aforementioned focus on developing markets where the demand for branded consumer goods is still growing rapidly fast has added to this development. Even if this road has become somewhat bumpier recently, the underlying growth is still intact and Unilever will continue to benefit in the long run.
Because of its high exposure to emerging markets, Unilever is an attractive option in the consumer goods sector.
Vodafone (NASDAQ:VOD) has been the best performing major European telecom stock for some years. It has been focusing on mobile communication where its roots lie and is an alternative to U.S. telecom giants AT&T (NYSE:T) or Verizon (NYSE:VZ). Now, the company is undergoing a transformation process; it has sold its share in Verizon Wireless for $130B and distributed the majority of the proceeds to its shareholders. Verizon Wireless contributed a noticeable share of Vodafone's earnings which is gone now. Instead, the company has been acquiring cable network providers like Kabel Deutschland in Germany and recently Ono in Spain. I have provided an outlook for the company here. The goal of this strategy is to expand its product offerings from predominantly mobile to "Unified Communication", offering its customers TV and broadband internet via the cable network in addition to mobile services. Vodafone generates 70% of its revenue in Europe and 30% in emerging markets, mainly in India and South Africa. Vodafone has the highest dividend yield (5.7%) among the ten companies and a market capitalization of $96B. It is also a constituent of the FTSE 100. The market environment is currently not in Vodafone's favor; its European operations have suffered from the crisis there and the strong competition in the European mobile telecommunication sector. The attractive growth rates in emerging markets on the other side is affected by currency devaluations. Nevertheless, Vodafone has certain advantages over its major European competitors: Its balance sheet is relatively healthy, allowing further investments in infrastructure and acquisitions to support its "Unified Communications" strategy. Vodafone's new acquisitions will contribute to top and bottom line growth over the years. Unlike its competitors, Vodafone has not cut its dividend recently, but continuously grown it over the years and remains committed to future dividend growth.
The exposure to emerging markets where mobile communications still grows, its new business model for Europe, and the very attractive dividend makes Vodafone my primary pick in the European telecommunication sector.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation, any material in this article should be considered general information, and not relied on as a formal investment recommendation. Before making any investment decisions, investors should also use other sources of information, draw their own conclusions, and consider seeking advice from a broker or financial advisor.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.