7 Dividend Paying ADRs Worth Considering

by: Ron Sommer
International trade is as old as trade itself. It is widely accepted that a diversified portfolio should have some exposure to the international markets. There are three ways to gain this exposure. Perhaps the easiest is to invest in American companies with extensive business overseas.
The trouble with this method is that the investor cannot focus on particular markets or areas of the world. The second method is the most difficult; it is the direct purchase of stock on foreign exchanges. The third method is to purchase American Depository Receipts (ADR) of foreign companies. A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on the NYSE, AMEX or NASDAQ exchanges.

We have sorted through hundreds of ADRs trading on the several exchanges and selected seven companies we think hold particular merit. Each of these companies pays a dividend. We believe the metrics EV/Invested Capital and Price/Tangible Book Value to be the most reliable predictors of return. Our models use EPS growth rates, payout, beta, ROE, ROIC and Debt to Capital ratios as inputs. Click to enlarge:

ASML Holding N.V. (NASDAQ:ASML) is a holding company, which operates through its subsidiaries. The Company is a provider of advanced technology systems for the semiconductor industry. It offers an integrated portfolio of lithography systems mainly for manufacturing complex integrated circuits (semiconductors, ICs or chips). The Company supplies lithography systems to IC manufacturers throughout Asia, the United States and Europe and also provides its customers with a range of support services from advanced process and product applications knowledge to complete round-the-clock service support. ASML’s main wholly owned operating subsidiaries include ASML Netherlands B.V., ASML Hong Kong Limited and ASML US, Inc. As of December 31, 2010, the Company had operating subsidiaries in the Netherlands, the United States, Italy, France, Germany, the United Kingdom, Ireland, Belgium, Korea, Taiwan, Singapore, China (including Hong Kong), Japan, Malaysia and Israel.

ASML has shown strong price momentum this year, being up about 25% over the past twelve months. It pays a decent dividend and with a P/E of 9.5X on trailing earnings, appears undervalued to its peers. Looking at the company on an EV/EBITDA basis, the company also looks undervalued. We value ASML on the basis of EV/Invested Capital. On this basis, we have a target value of $66.92.

CANON INC. (NYSE:CAJ) is a Japan-based manufacturing company. The Company operates in three business segments. The Office segment provides office network, color network and personal multifunction devices, office, color and personal copy machines, laser printers, large-sized ink-jet printers and digital production printers, among others. The Consumer segment provides digital single-lens reflex cameras, compact digital cameras, interchangeable lens, digital video cameras, ink-jet multifunction devices, single-function ink-jet printers, image scanners, television lens for broadcasting use, among others. The Industrial Equipment and Others segment provides exposure equipment used in semiconductor and liquid crystal displays (LCDs), medical image recording equipment, ophthalmic instruments, magnetic heads, micro motors, computers, handy terminals, document scanners and calculators, among others.

CAJ has underperformed the market over the past twelve months. Though it provides a better than average dividend yield, its P/E ratio suggests the company is fairly priced relative to other companies in the computer peripheral segment. On a PSR basis, the company also trades in line with others in its segment. We have a target price of $68.11 based on our projected Price/TBV estimate.

Gerdau S.A. (NYSE:GGB) is a producer of long rolled steel. Gerdau operates steel mills that produce steel by direct iron-ore reduction (DRI) in blast furnaces and in electric arc furnaces (EAF). In Brazil it operates four integrated steel mills, including its mill, Ouro Branco unit, an integrated steel mill located in the state of Minas Gerais. The Company has a total of 59 steel producing units globally, including joint ventures and associate companies. The joint ventures include a unit located in the United States for the production of flat rolled steel and another unit in India. The associate companies are Aceros Corsa S.A. de C.V. (Aceros Corsa) in Mexico, Corporacion Centroamericana del Acero S.A. (Corporacion Centroamericana del Acero) in Guatemala and Industrias Nacionales (INCA) in the Dominican Republic. The Company operates in four segments: Brazil (Brazil BO), North America (North America BO), Latin America (Latin America BO) and Specialty Steel (Specialty Steel BO).

GGB is showing a significant price decline for the past twelve months. The dividend yield is low relative to what a dividend investor might expect but with a yield of 0.6%, it is better than the median steel maker. The company trades at a moderate PE of 10.8X on trailing earnings; a discount from its peers. A PSR of less than 1X suggests this company may be undervalued. The EV/EBITDA ratio is higher than what we would expect to see for this company. We establish a target value of $14.99 based on our projected Price/TBV value.

Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) is a holding company. The Company principal operating subsidiary is Bachoco, S.A. de C.V. Bachoco is a poultry producer in Mexico. Its main product lines are chicken, table egg, balanced feed and swine. During the year ended December 31, 2009, the Company produced approximately 9.5 million chickens per week. With over 800 production and distribution facilities dispersed throughout Mexico, the Company’s operations include preparing balanced feed, breeding, hatching and growing chickens, and processing, packaging and distributing chicken products. Bachoco is also a significant producer of commercial balanced feed. During 2009, the Company sold 338 thousand tons of balanced feed to external customers. As part of its other product lines, the Company also sells swine on the hoof to meat packers for pork product production, miscellaneous poultry-related products, turkey and beef value-added products.
IBA shows very strong price momentum for the past twelve months, gaining 33% during that period. The company has a current dividend yield of 2.0% and sports a PE of 11.6X which is substantially higher than its industry peers. On both a PSR basis and PBV basis, the company trades in line with its peers. The EV/EBITDA suggests the company may be undervalued. Based on our estimate of Price/TBV, we think the company’s price can rise to $55.23.
Nokia Corporation (NYSE:NOK) has three operating segments: Devices & Services; NAVTEQ, and Nokia Siemens Networks. Devices & Services is responsible for developing and managing the Company’s portfolio of mobile products, as well as designing and developing services, including applications and content. NAVTEQ is a provider of digital map information and related location-based content and services for mobile navigation devices, automotive navigation systems, Internet-based mapping applications, and government and business solutions. Nokia Siemens Networks provides mobile and fixed network infrastructure, communications and networks service platforms, as well as professional services and business solutions, to operators and service providers. In April 2010, the Company completed the acquisition of Novarra, Inc. and MetaCarta Inc. In September 2010, Nokia acquired Motally, Inc. In December 2010, Renesas Electronics Corporation acquired Nokia’s Wireless Modem business.

Nokia has been having a bad time of it with its products no longer the market leaders. The company is trading down about 23% for the past twelve months as competitors have brought to market new products leaving NOK in the dust. The company pays a dividend yielding 6.0% and trades at a PE of 12.5X, about half the PE of others in this segment. On a PSR basis, NOK is also trading at a substantial discount to its peers. The question here is whether or not Nokia can get its act together and get back into the game. On a Price/TBV basis, we give NOK a value of $11.91.

NTT DOCOMO, INC. (NYSE:DCM) is a mobile telecommunication services provider belonging to NTT group whose parent company is Nippon Telegraph and Telephone Corporation (NTT). The total number of subscriptions to its cellular services freedom of mobile multimedia access (FOMA) and mova was approximately 56.08 million and its domestic market share was 50% as of March 31, 2010. The Company has two segments. The mobile phone business segment includes FOMA services, mova services, packet communications services, satellite mobile communications services, international services and the equipment sales related to these services. The miscellaneous businesses segment includes home shopping services provided primarily through television media, high-speed Internet connection for hotel facilities, advertisement services, development, sales and maintenance of information technology (IT) systems, credit services and other miscellaneous services.

DCM has given good market returns over the past twelve months. With a PE of 12.8X, it trades at a small discount to its peers. Based on its current PSR, it is trading at a slight premium to its peers. Telecom companies are often viewed on the basis of EV/EBITDA. With an EV/EBITDA ratio of 3.88X, low even for a company in this segment, DCM appears to be mispriced. Using our estimate of Price/TBV, we set a value of $27.00 for DCM.

Ternium S.A. (NYSE:TX) is a steel company in Latin America, manufacturing and processing a range of flat and long steel products for customers active in the construction, home appliances, capital goods, container, food, energy and automotive industries. Ternium produces and distributes a range of finished and semi-finished steel products, including steel products such as cold-rolled coils and sheets, galvanized and electro galvanized sheets, pre-painted sheets, tin plate, welded pipes, hot-rolled pickled and annealed and tailor-made flat products. The Company operates in three segments: flat steel products, long steel products and others. During the year ended December 31, 2009, approximately 60% of Ternium’s sales were made to North America, 35.9% to South and Central America, and 4% to Europe and other markets. On May 7, 2009, Ternium completed the transfer of its entire 59.7% interest in Sidor to Corporacion Venezolana de Guayana (CVG).

TX’s shares are down about 10% in the past twelve months. Its dividend yield is better than its peers and the trailing PE is at a discount. The EV/EBITDA ratio of 5.58X also suggests that TX is undervalued. Our Price/TBV model suggests a stock value of $67.07.

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  • Analyst forecasts for ASML FY11 EPS range from $3.76 to $5.11 and $3.67 to $5.53 for FY12. The projected 3-5 year growth rate is 8.2%. The company converts 94% of its earnings to free cash flow. The $0.59/share dividend is well covered by both earnings and free cash flow.
  • Seven analysts follow Gerdau. Their FY11 forecasts range from $0.854 to $1.53 and for FY12, $1.325 to $1.976. The estimated 3-5 years EPS growth rate is 18.4%.
  • Nokia is followed by 26 analysts. EPS estimates range from a low of $0.49 to a high of $0.952 for FY11 and $0.56 to $1.318 in FY12. The consensus 3-5 year EPS growth rate estimate of 5.633% masks the broad range of growth expectations. Analysts are forecasting 3-5 year growth rates ranging from -14.0% to 22.8%. Clearly, there is no real consensus.
  • DCM is followed by two analysts. There estimates for FY11 range from $1.42 to $1.463; FY12, $1.47 to $1.518. The 3-5 year growth rate is estimated at 3.9%.

  • Canon pays a dividend of $1.48/share. CAJ produces a free cash flow well in excess of earnings and easily supports this dividend. Earnings estimates for FY11 and FY12 reflects the opinion of one analyst.
  • IBA is not followed so there are no analyst estimates. However, we see the cash flow to earnings ratio is 1.45X and both EPS and FCF easily support the dividend.
  • There are 13 analysts making earnings estimates for TX. The estimates range from $2.87 to $4.62 in FY11 and $3.01 to $4.78 in FY12. The projected 3-5 year EPS growth rate ranges from $0.6% to 15.2%.

Each of these companies is expected to have earnings and free cash flow adequate to cover the declared dividend. Earnings and EPS growth rates vary very widely highlighting the risks of investing in any of these issues.

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We consider debt to be the biggest risk factor for any company. Slippage in earnings or sales can be a temporary situation which can be addressed if the company has the time and resources to address. Debt, on the other hand, brings bankruptcy or a fire sale.

ASML is showing strong profitability as measured by CFROI and ROE. It has sufficient resources to meet its short-term needs. Its long term debt can be paid-off with about six months of free cash flow. The company has little debt and a strong equity to invested capital position.

Canon is also profitable on a CFROI and ROE basis. It has almost no long term debt. The current ratio indicates that its short term needs are well met.

GGB demonstrates its profitability with respectable CFROI and ROE numbers. However, it has substantially greater exposure to long term debt. The LTD/FCF ratio of 3.47x is higher than we ordinarily find acceptable. LTD to working capital is about 162%. When considering GGB’s short-term obligations and its long term debt, we conclude that GGB is well positioned to meet its needs.

IBA has little debt and there is no reason question its ability to meet its obligations.

Nokia carries a heavier long term debt load than some of the other companies listed here. Again, the LTD/FCF ratio is higher than we like. Unlike with GGB, the LTD to working capital ratio is a moderate 42%.

DCM reports adequate profitability as measured by CFROI and ROE. There is little debt.

Ternium shows a fairly low level of profitability as measured by CFROI but an adequate level when measured by ROE. Long term debt coverage is provided by more than three years’ worth of free cash flow. Short term, the company’s obligations appear to be well covered.

All seven companies are interesting in their own way. We offer a Dutch semiconductor company, a Japanese computer peripheral manufacturer, Brazilian steel maker, Mexican fish and livestock producer, Finnish telecom equipment maker, Japanese telecom services provider and a European (Luxemburg) steel maker.

Our favorites are ASML, IBA and TX.

Disclosure: I am long ASML.