International Dividend Stocks On Discount - September 2018

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Includes: AAALF, BAYZF, BMWYY, BTAFF, CTTAF, FLMNF, FRTAF, HOCFF, IDEXY, INGIF, PGPEF, SSEZF, UDIRF, VODAF, WPP
by: Torsten Tiedt

Summary

Your stock’s purchase price determines your initial dividend yield.

A price decline may be an opportunity to start with an increased initial dividend yield.

A monthly scan for the most significant price declines helps you find these opportunities.

International Dividend Stocks On Discount Welcome to the September edition of “International Dividend Stocks On Discount”. Each month, I create a list of dividend stocks outside the U.S. with more than 5% discount in the last month. The purpose is to identify potential bargains for dividend investors.

Though, we need to be careful! As you surely know, a dropping stock price typically means one of two things: either it is an opportunity to get more bang for your buck, or it is a warning sign that the company is facing serious headwinds and future dividends may be at risk.

To assist you in evaluating the situation, this time I look at the 3 dividend stocks with the highest dividend yield. The objective is to give you an overview of the company’s current situation by checking the most essential aspects. Namely:

  • checking the long-term profit-growth based on earnings and cash flows.
  • checking if dividends are secure by looking at cash-flows, and if necessary debts and assets as well.
  • checking the current valuation using a dividend focused perspective, by comparing current to historic dividend yield.
    This is done by what I call the relative dividend yield, which is based on the logic of the implied volatility rank used in option trading. In short, the relative dividend yield examines the current dividend yield in relation to its historical context. The metric's value ranges from 0 to 100. 100 means the current dividend yield is at all-time-high. If the current dividend yield is at all-time-low the relative dividend yield is 0.
  • checking the current valuation by calculating fair values based on historic multiples of metrics like earnings per share (FV PE), operating cash-flows per share (FV OCF) or funds from operations per share in the case of REITs.

Please do not expect multiple in-depth analysis in this one article. Instead, I present to you what I think to be the most essential aspects to give you a solid idea if it’s worth digging deeper.

The list of international dividend discount stocks considers nearly 300 of the most popular dividend stocks outside the U.S. To ensure a minimum quality and attractiveness of all stocks, each stock needs to match the following criteria:

  • Dividend increase of at least 5 years in a row (dividend contender)
  • Current dividend yield of at least 2%
  • Market capitalization of at least 1 billion USD
If not stated otherwise, screenshots and data are taken from DividendStocks.Cash

Important remarks due to the international context

ISIN vs. Symbol

The summary table of the international edition of dividend discounts contains the ISIN (International Securities Identification Number). The ISIN is helpful because it uniquely identifies a given security, while the symbol is a data provider's specific combination of security and exchange. The ISIN allows readers all over the world to quickly find the security and then select the appropriate exchange on their own which may be located outside the US.

Domestic currency vs. US dollar

All discounts are calculated based on the domestic currency of the stock. For European stocks, it's mostly EUR; for Chinese Stocks it may be HKD (Hong Kong dollar) or CNY (China yuan renminbi) and so forth. This procedure excludes the effects of exchange rate fluctuations to the USD, which would be meaningless for investors outside the US.

Similarly, all screenshots and analysis (e.g. earnings per share) are based on the domestic currency to avoid exchange rates blurring the real performance.

Covered regions

Covered regions comprise Canada, Western Europe, China, Japan and Australia. The domestic country of the company is part of the list.

Before we start, let’s look back at what happened to the stocks on discount in the previous edition of August.

Symbol

Isin

Company

Country

Price Change %

Yield %

Relative Yield

Years

OTCPK:BAYZF

DE000BAY0017

Bayer AG

Germany

-6.7

3.8

82

8

OTCPK:BTAFF

GB0002875804

British American Tobacco

Great Britain

-4.1

5.6

84

19

OTCPK:CTTAF

DE0005439004

Continental AG

Germany

-3.4

3.1

23

6

OTCPK:IDEXY

ES0148396007

Inditex

Spain

-1.4

2.1

34

7

OTCPK:VODAF

GB00BH4HKS39

Vodafone Group

Great Britain

-1.2

8.5

100

15

OTC:HOCFF

DE0006070006

Hochtief AG

Germany

1.6

2.4

22

5

OTC:AAALF

DE0005408116

Aareal Bank

Germany

2.6

6.9

57

5

OTC:INGIF

FR0000125346

Ingenico

France

7.4

2.5

80

6

September price changes of the stocks in the September edition of International Dividend Stocks On Discount.

5 out of 8 stocks continued their slide with Bayer loosing 6.7% after already loosing 16.4% in the previous month. In contrast, Ingenico managed a rebound with +7.4%. In the previous article, I covered Bayer, Ingenico, Continental, Inditex and Vodafone in detail.

September Dividend Stocks On Discount

The table below contains international dividend stocks with discounts of more than 5% in September:

Symbol

Isin

Company

Country

Discount %

Years of dividend increase

Yield %

Rel. Div. Yield

OTCPK:FLMNF

DE0005772206

Fielmann AG

Germany

-12.3

13

3.7

59

OTCPK:UDIRF

DE0005089031

United Internet

Germany

-11.3

5

2.1

31

FRTAF

DE000A0Z2ZZ5

Freenet

Germany

-9.7

8

8.0

61

WPP

JE00B8KF9B49

WPP PLC

Great Britain

-9.6

22

5.3

95

WHTCF

DE0007507501

Washtec

Germany

-9.2

5

3.3

17

OTCPK:SSEZF

GB0007908733

SSE PLC

Great Britain

-8.5

25

8.4

100

OTCPK:BAYZF

DE000BAY0017

Bayer AG

Germany

-6.7

8

3.8

82

OTCQX: PGPEF

FR0000130577

Publicis Groupe

France

-5.6

6

3.8

98

OTCPK:BMWYY

DE0005190003

BMW AG

Germany

-5.6

8

5.1

81

International dividend stocks with discounts in September 2018

This time the list contains European stocks only with 6 out of 9 stocks belonging to Germany.

Because some stocks may be unknown to the reader, I present a second list containing more details for each stock:

A second look at international dividend stocks with discounts in September 2018

Instead of covering the stocks with the highest discounts, this time I decided to cover stocks with the highest dividends. I hope this selection might be more interesting.

SSE PLC (OTCPK:SSEZF)

Buy one stock – get two. This is made possible by the planned demerger of SSE Energy Services subject to approval of shareholders and regulators. The demerger results in a loss of revenue of 4 billion GBP out of 38 billion GBP (10.5%) and of about 220 million GBP in operating profit out of 1.380 billion (15.9%).

The latest annual report shows that the English energy market is challenging. Decentralisation, decarbonization, electrification of public transport and heavy investments in infrastructure combined with political pressure to deliver affordable services to the public, create a difficult environment for long-term profit-growth.

SSE PLC: Long term profit-growth profile including dividends

Although being a dividend aristocrat, I don’t consider SSE’s dividends to be future-proof. Dividends were covered by free-cash-flow only for a tiny part for years. The current pay-out-ratio is 573%.

How can a company sustain dividends it seemingly cannot afford? Typically, by either taking on new credits, emitting new shares or consuming parts of its assets. In the last years, the number of outstanding shares constantly increased from 858 million in 2004 to 1.017 million today, and within the same time frame, the debt ratio increased from 68% to 77.5%.

SSE PLC: The company needed to finance 693 million GBP not covered by free-cash-flow in the last 12 months.

The Relative Dividend Yield of 100 points shows that the current dividend yield of 8.5% represents an all-time-high. Yet a successful demerger will hopefully cut dividends to a more sustainable level. Accordingly, analysts estimate dividends to decrease to 7.1% in the following business year.

SSE PLC: All-time-high for dividends. But unfortunately, they are not sustainable

Fair value calculations based on historic operating cash-flows indicate the company to be slightly under-valued. The high fair value based on dividends is dangerous to be used because of probable dividend cuts ahead, which lead to lower valuations in the future.

SSE PLC: Fairly valued, but no bargain

Due to modest long-term profit-growth in a challenging environment combined with a probable demerger, making you an investor of a company you may not want, I don’t consider this stock to be a very promising investment.

Freenet (OTC:FRTAF)

Freenet is a German telecommunication provider with about 13 million customers. The company doesn’t own its proper network but acts as a reseller of tariffs and services. As in most developed countries, the telecommunication market is saturated and growth is mostly a matter of winning market share or entering new markets.

Nevertheless, Freenet managed to increase both cash-flows and earnings in the last years. Furthermore, after stopping dividend payments in 2006 the company started paying dividends again in 2009 till today.

Freenet : Long term profit-growth profile including dividends

Despite solid results, the stock price dropped 36% since its high on the end of January, boosting the dividend yield to 8.0% - fully covered by free-cash-flow.

Freenet: declining stock price despite solid results

The Relative Dividend Yields is “only” 61 out of 100 points, because in 2012 the dividend yield was already close to 12%(!) when the stock price was as low as 10 Euro and dividends of 1.20 Euro were paid.

Freenet: The Relative Dividend Yield is 61 out of 100 points

Investors taking the chance in 2012 were rewarded not only with extremely high dividends but with capital gains of more than 200% within the next 5 years.

Freenet: Despite recent losses, still a good investment within a longer time-frame.

Fair Value calculations indicate that the recent drop of the stock‘s price might be related to an overly ambitious valuation. Indeed, fair value calculations based on historic multiples of earnings and operating cash-flow show that today’s stock price closely matches both fair values.

Freenet: After a longer period of over-valuation the stock seems to be fairly valued again

I haven’t found negative reports about Freenet’s running operations and thus believe that a simple over-valuation might be a major reason for the declining stock price. Thanks to covered dividends and stable profits, I consider Freenet to be a possible investment for dividend income investors.

WPP PLC (NYSE:WPP) and Publicis Groupe (OTCQX: PGPEF)

I cover both stocks simultaneously because they basically share the same characteristics and challenges. Regarding the challenges, both classic advertising companies face serious competition from Internet giants like Facebook (FB) and Alphabet (GOOG) while additionally suffering from budgets cuts of its loyal clients, mostly big brand names with low to stagnant growth.

This unfavourable mix makes investors fear that the success story of classic advertising companies comes to an end, which would be a pity, because the picture below shows that WPP was a pleasing investment for a very long-time:

WPP : Long term profit-growth profile including dividends

The same holds true for Publicis Groupe. The earnings loss in 2016 was due to one-time impairment charges.

Publicis Groupe : Long term profit-growth profile including dividends

Both stocks are solid dividend stocks, with WPP’s dividend of 5.3% being higher than Publicis Groupe’s with 3.8%. Regarding free-cash-flow, both companies cover their dividends, with Publicis Groupe’s pay-out ratio of slightly under 30%, being very low.

WPP’s Relative Dividend Yield is 95 points and close to an all-time-high.

WPP: The Relative Dividend Yield is 95 out of 100 points

Although Publicis Groupe’s dividend yield is lower, its Relative Dividend Yield is even higher than WPP’s with 98 points:

Publicis Group: The Relative Dividend Yield is 98 out of 100 points

Without surprise, fair value calculations indicate an under-valuation for both stocks, a clear indicator of the market’s distrust.

This is the fair value chart of WPP:

WPP: Fair value calculations

Fair values range from 15 GBP to 19 GBP vs. a stock price of 11.40 GBP based on historic valuations.

And this one is for Publicis Group:

Publicis Group: Fair values

Fair values based on earnings and operating cash-flows range from 55 EUR to 64 EUR vs. a stock price of 52.20 EUR. The dividend-based fair value shouldn’t be considered, because it starts peaking in 2016 due to disproportionally high dividend increases in the same period.

Overall, an investment in any of the traditional advertising stocks depends if you believe in their future. I was long in WPP until recently. After the new COO send the stock’s price down with a negative summary of his own company, I traded my shares against Ingenico (OTC:INGIF).

Dividend rhythm of all international stocks on discount

The dividend rhythm of a company partly depends on the domestic country of the company. The dividend calendar below shows in which month you need to own the stock to claim dividends based on the ex-date (bell symbol) and when dividends get paid based on the payment date (dollar symbol):

Month of ex-date and payment date all internationals dividend stocks on discount

Conclusion

I presented a list of international dividend stocks with the highest "discounts" in September and tried to make a first approach to the 3 stocks with the highest dividend yields including Publicis Group. What's your opinion? Are you interested in any of these stocks? Did you even take the chance to "buy the dip"?

Disclosure: I am/we are long INGIF, BTAFF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.