Bottom Fishing EU Style: Top 8 European Dividend Yields

by: Plan B Economics

The world is perfectly aware of the sovereign debt crisis plaguing various EU members. Not knowing what the EU will look like in the future, many investors are staying away from the continent as a whole. While there could be good reason to stay away from Greek, Spanish, Italian and Portuguese sovereign bonds - particularly if these countries end up leaving the EU system - many investors are throwing out the corporate baby with the sovereign bathwater.

Investors are understandably scared of bonds issued by various EU governments. Governments may default potentially leaving bond investors with cents on the euro. However, many European corporations don't deserve the same treatment. While European corporations will suffer during a sovereign debt crisis, many have the flexibility to survive and recover as the crisis subsides. With many European stocks down significantly over the past 5 years, investors are starting to bottom-fish. Instead of fishing based on poor performance, some investors choose to fish based on dividend yield (which often rises due to weak stock price performance).

To assist, I ran a screen for the top 8 dividend yields for large cap European stocks traded on a US exchange. This is not a list for the faint of heart. Europe has not dealt with its mess and we could see more volatility. Still, even if not for immediate investment, investors would be wise to start exploring European stocks that could be potential buys when the bottom finally arrives. Of course, this is only a preliminary screen and is meant to help investors create a short-list for further research.

Here are the 8 names I came up with:

Ticker Company Industry Country
(FTE) France Telecom Telecom Services - Foreign France
(NYSE:NOK) Nokia Corporation Communication Equipment Finland
(NYSE:BBVA) Banco Bilbao Vizcaya Argentaria, S.A. Foreign Regional Banks Spain
(NYSE:AZN) AstraZeneca PLC Drug Manufacturers - Major United Kingdom
(NYSE:TOT) Total SA Major Integrated Oil & Gas France
(NYSE:NGG) National Grid plc Gas Utilities United Kingdom
(NYSE:E) Eni SpA Major Integrated Oil & Gas Italy
(NASDAQ:VOD) Vodafone Group plc Wireless Communications United Kingdom

Note: my list originally included Telecom Italia, but due to insufficient data I excluded it.

And here is how these 8 stocks have performed over the past 5 years. As you can see, many of these names have taken a beating:

FTE Chart

FTE data by YCharts

TOT Chart

TOT data by YCharts

First of all, I won't assume that any of these stocks are good buys right now. For this reason, I want to make sure these stocks will pay me to wait if I dive in too early.

Below are the dividend yields and payout ratios for each stock. Out of these names, I would only consider the yields for BBVA, AZN, TOT, NGG and E as somewhat sustainable. All other names either have negative earnings or very high payout ratios.

Ticker Dividend Yield Payout Ratio
FTE 13.25% 98.81%
NOK 9.12% neg
BBVA 6.50% 21.40%
AZN 5.94% 44.47%
TOT 5.78% 47.79%
NGG 5.58% 68.81%
E 5.53% 55.75%
VOD 5.14% 96.98%

I also took a look at the valuations for these stocks. Based on the table below, some of these companies are trading below book value and below cash. However, I would avoid the stocks with negative earnings (and therefore no P/E ratio) since these could be cheap for a very good reason.

In my opinion, with the exception of NOK, all the stocks below appear to have a decent valuation.

Ticker P/E Forward P/E P/S P/B P/Cash
FTE 7.21 7.91 0.58 0.95 3.52
NOK neg neg 0.24 0.89 0.83
BBVA 14.36 8.96 2.32 0.83 0.09
AZN 7.69 8.13 1.93 2.74 6.5
TOT 8.31 7.14 0.54 1.26 6.28
NGG 12.14 13.68 1.81 2.78 9.2
E 9.78 9.65 0.55 1.15 13.6
VOD 13.18 11.14 2.02 1.15 11.07

Looking at profitability, I again would stay away from NOK. The other listings appear to be reasonably profitable, whether looking at operating margins, ROA or ROE.

Ticker Operating Margin Return on Assets Return on Equity
FTE 16.30% 4.01% 13.28%
NOK -9.42% -13.01% -32.59%
BBVA 14.26% 0.46% 5.74%
AZN 33.87% 15.72% 36.00%
TOT 13.17% 6.86% 16.26%
NGG 25.08% 4.35% 22.25%
E 14.36% 5.25% 12.35%
VOD 24.10% 4.82% 8.46%

Despite their fair profitability, note how FTE, BBVA and NGG all have comparatively high Long-Term Debt-to-Equity ratios. In a volatile economic environment, I would prefer to hold companies with very little debt. The 2008/2009 credit crisis demonstrated how a heavy debt load can be the death of a company that is dependent on frequent credit rollovers. Meanwhile, companies that held little debt rode out revenue fluctuations fairly well.

Ticker LT Debt/Equity
FTE 1.2
NOK 0.44
BBVA 2.2
AZN 0.33
TOT 0.32
NGG 2.22
E 0.43
VOD 0.37

Data source: Finviz

Disclosure: I am long E, TOT. 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.

Disclaimer: This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.