To paraphrase Bob Dylan, the old world is rapidly fading and the times they certainly are a-changin'. Athens is ablaze, and uncertainty over the extent to which Greece and other Mediterranean euro partners will set off shocks that dog a depressed Europe and the rest of the world - old, young or adolescent. Even if Greece can remain tied to the euro and meet the demands of the "troika," will that be enough to stabilize the eurozone, let alone return the continent to a growth path?
Let's look at four large, dividend-paying companies we'll call "Big Europe" and use them as a proxy for the case of investing in this dicey environment. I've picked the American depositary shares of two Spanish companies, Telefonica (NYSE:TEF) and Banco Santander (STD), and two French companies, France Telecom (FTE) and TOTAL (NYSE:TOT).
I'll say it upfront. With perhaps the exception of TOTAL, the only reason to accumulate shares in Big Europe is to capture dividend income. The question, then, is two-fold: Can the dividends be sustained, and, if so, could that stream of income be bought more cheaply down the road?
Take Banco Santander, please. The multinational bank based in Madrid sports an industry-high dividend yield of 10.13% vs. peers' 3.97% average, and its payout ratio is 77.33%, 1.65 times the industry average of 46.73%. However, its cash flow growth rate over the last five years has been 9.4% vs. a 5.46% industry average, according to S&P Compustat. On the earnings front, the projected long-term EPS growth rate is just an annualized 0.93% vs. 9.22% for the industry, according to analysts' estimates compiled by S&P.
And just this past week, Banco Santander said it was adding an additional 2.3 billion euros ($3 billion) to loan loss reserves to cover potential losses from real estate assets.
The company last traded at $8.54 per ADS. Its 52-week range is $12.70-6.77. If one is enamored of the juicy dividend and believe it is sustainable (a leap of faith), we believe it can get cheaper to capture.
Telefonica, the Spanish telecom giant, is another high yielder. Its dividend returns 12.36% at the current stock price of about $17.20 per share, vs. 6.75% for peers. Earnings have suffered more than the industry, declining 65.5% on a trailing 12 month basis compared with a decline of 29.91% for the industry.
Moody's recently revised its outlook for Telefonica's debt to negative from stable, citing concern over Spain's macroeconomic environment. Moody's said it expected key financial ratios to remain under pressure, despite the company's announcement late last year that it was cutting its dividend by 14%.
In other words, Telefonica is another example of a dividend play that, in my view, should attract only the gambler and the greedy.
One allure is that Telefonica is closer to its 52-week bottom of $16.53 than its high of $27.31.
In contrast, France Telecom appears a safer name for bargain-hunting telecom investors. With a dividend yield of 13%, the prospect of asset sales, and the stock price near its 52-week low of $14.50, investors should feel relatively protected from a dividend cut. Another bit of assurance is gleaned from the French state's ownership of about 27% of the company.
What's more, France was the only nation in the euro zone with a growing economy last quarter, according to Eurostat.
Our conclusion: Buy France Telecom as a safer high-yielding play in Europe.
Meanwhile, the fortunes of Paris-based international oil giant TOTAL are steered by crude prices and the company's ability to execute.
The realized price for Brent in 2011 was $111.3 per barrel versus $79.5 per barrel in 2010, a boon to upstream activities but tough on downstream. Realized gas prices for 2011 increased 27% year over year to $6.53 per Mbtu from $5.15 Mbtu in 2010.
TOTAL's dividend yield is 5.50%, compared with peers' 3.36% average. Its price/operating cash flow multiple (trailing 12 months) is 4.9, comparable to the industry average of 5.8.
With a net debt-to-equity ratio of 23% at the end of 2011 versus 22.2% at the end of 2010, TOTAL sports a strong balance sheet that should only enhance its ability to return cash to shareholders.
Of course, one's outlook for oil prices is central to an investment decision in this sector. TOTAL's aggressive exploration agenda, including increased production at its field in Angola that came on line last year, should be rewarded if oil prices remain elevated.
"Big Europe" isn't monolithic. This is one super-sized European company that should be able to dodge whatever frailties beset the troubled continent it calls home.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.