The recent economic and financial turmoil in Europe has driven the prices of European shares sharply lower. This has turned the solid dividend-paying stocks into bargains, while boosting dividend yields. While the higher yields also reflect a higher risk inherent in the European stocks, many dividend-payers with solid fundamentals look particularly attractive. Investors should search for the best yield in Europe for several compelling reasons:
- Comparably higher yield: Overall, the current average yield of 4.5% in Europe is much higher than that in the U.S., UK or Japan.
- More attractive than alternative income investments: In some European markets, dividends exceed government bond yields by as much as 50%. They are also higher than the yields on many corporate bonds.
- Robust dividend growth: According to JPMorgan (JPM), the European shares, as measured by the MSCI Europe ex UK Index, have boosted dividends at an average rate of 5.7% since 1999. This compares to a meager growth in U.S. dividends over the same time horizon.
- Low payout ratios: While Europe overall faces lower profitability in the coming years, which could limit dividend growth, dividend payout ratios are below the historical average and could rise further.
Here is a quick glance at five solid dividend payers in Europe:
Royal Dutch Shell (RDS.A)(RDS.B) is Europe's largest oil and natural gas company. This British-Dutch energy giant pays dividend yields of 4.7% on class A shares and 5.3% on class B shares. The company's payout ratio is at 30% on class A shares and 34% on class B shares. Its peers BP Plc. (BP), Total S.A. (TOT) and Statoil (STO) pay dividend yields of 4.8%, 5.5% and 3.9%, respectively. Shell's dividends grew at an average annual rate of 5.2% over the past five years. The EPS is forecast to rise 5.7% next year. The company's operations through new production and acquisitions are expanding around the globe, and the energy giant is taking advantage of shale gas boom in North America with plans to build liquid natural gas [LNG] terminals for LNG export to Asia. Shell's forward P/E is below that of its peers on average, but slightly higher than the company's own historical metrics. The shares are trading at $67.53 a share (class A) and $70.11 a share (class B), down 7.5% over the past year. Value investor David Dreman is bullish about the company.
Total SA is another European oil and natural gas company with global operations. This French $99 billion energy giant pays a dividend yield of 5.5% on a payout ratio of 37%. Its peers, Royal Dutch Shell /, BP Plc, and Statoil pay yields of 4.7%/5.3%, 4.8% and 3.9%, respectively. The company's dividend increased at an average rate of close to 4% per year over the past five years. Over the same period, EPS growth averaged a mere 1.3% per year. EPS growth is estimated to grow at an average rate of 7.1% per year for the next five years. The company has solid revenue growth, attractive valuation, and good balance sheet with reasonably low debt. In terms of valuation, the company's shares are trading at a discount relative to peers on average. The stock is changing hands at $43.29 a share, down 23% over the past year. Fund manager Andrew Hall (Astenbeck Capital Management-see its top picks), David Dreman, and billionaire Ken Griffin are bullish about the stock.
Sanofi (SNY) is a $97 billion French pharmaceutical company. Its dividend yield is 4.5% and the payout ratio is 58%. The company's competitors GlaxoSmithKline (GSK), Pfizer (PFE), and Merck & Co. (MRK) pay dividend yields of 4.7%, 3.9% and 4.0%, respectively. Sanofi has seen its dividend grow at 3.7% and EPS expand at 3.5% per year over the past five years. Analysts forecast that the company's EPS growth will rise to an average annual rate of 13.4% for the next five years. In terms of valuation, this pharma giant is trading at a discount relative to peers. The stock is changing hands at $36.81 per share, down 7.4% over the past year. Billionaires Warren Buffett and Ken Fisher are big fans of the stock.
ABB Ltd. (ABB) is a $37 billion power and automation technology company serving utility and industrial customers. It pays a dividend yield of 4.4% on a payout ratio of 50%. Its competitors Siemens AG (SI), Rockwell Automation (ROK) and Emerson Electric Company (EMR) pay dividend yields of 3.5%, 2.9% and 3.6%, respectively. The company increased its dividends at an average rate of 35% and EPS at a rate of 15% per year over the past five years. It is forecast to grow its EPS at an average rate of 15.2% a year for the next half decade. The stock has a forward P/E of 13.5 times, on par with that of its industry on average. Shares are trading at $16 per share, down 37.4% in a year. The company is popular with billionaires Ken Fisher and Jim Simons.
Novartis AG (NVS) is a $135 billion pharmaceuticals and healthcare products company headquartered in Basel, Switzerland. It pays a dividend yielding 4.4% on a payout ratio of 70%. Novartis' peers Merck & Co, Sanofi and Pfizer pay dividend yields of 4.0%, 4.5% and 3.9%, respectively. The company grew its EPS and dividends at average rates of 5.6% and 17.7% per year, respectively, over the past five years. In the coming half decade, the EPS is forecast to increase at a 4.1% annual rate. The stock is trading on a forward P/E well below the company's own historical ratios. The shares are selling at $55.56 a share, down almost 10% over the past year. Billionaire D. E. Shaw is particularly fond of the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.