by Charles Sizemore | April 3, 2014 12:47 pm
Here’s a stat that could shape where you look for dividend stocks in the near future: Spanish bond yields are sitting near 200-year lows.
Yes, 200, as in two centuries. The last time Spain had yields this low, Napoleon had only recently been exiled to Saint Helena. The Spanish 10-year government bond now yields 3.26%. As recently as a year ago, yields were over 5%.
And Spain’s not alone; 10-year yields in France (2.1%), Italy (3.3%) and even Ireland 3.0%) are sitting at levels no one would have believed a year ago: 2.1%, 3.3% and 3.0%.
The driving factor in the fall in yields was a return in investor confidence; while the eurozone is still in bad shape, it won’t be breaking apart any time soon. But don’t underestimate the precipitous drop in inflation across the eurozone, as well as expected quantitative easing by the European Central Bank. This monetary tailwind boosts the chances that European stocks will outperform their American counterparts.
Of course, all else is not equal. European stocks are also much cheaper than American equities, based on the most recent cyclically adjusted P/E ratio figures. According to data just released by Meb Faber’s Idea Farm, Ireland, Austria, Italy, Spain, the U.K. and France all trade at CAPEs of 8.4 to 14.4. The U.S. market trades hands at a CAPE of 25.4.
The combination of cheaper valuations and a more favorable monetary regime should make European stocks the better bet over the next several years. So with that said, today I’m going to recommend three solid European dividend stocks that I expect will generate significantly better total returns than the S&P 500.
Dividend Yield: 5.3%
Norwegian telecom operator Telenor (TELNY) has exactly what I like to see in “emerging markets lite” dividend stocks. It’s headquartered in a well-regulated European market, and it has a large-enough market presence in developed markets to provide a level of stability. Norway accounts for 24% of revenues, with other European markets (primarily Sweden and Denmark, though Telenor has significant operations in Hungary, Serbia. Montenegro and Bulgaria as well) making up another 24%.
But the real growth story comes from Telenor’s stake in emerging Asia, which makes up 45% of revenues. Telenor has a major presence in Thailand, Malaysia, Bangladesh, Pakistan, India and Myanmar.
India has been something of a regulatory minefield for telecom operators of late, though Narendra Modi, the frontrunner in India’s elections this month, has a reputation for being pro-business and anti-red tape. An election win by Modi should bode well for Telenor’s Indian operations, which while still very small (about 3% of revenues), account for much of Telenor’s recent subscriber growth. Telenor added 17 million new subscribers last year, with most of them coming from South Asia.
Telenor pays a respectable 5.3% dividend yield, but importantly, it grew its dividend by 17% in 2013. Telenor has grown its dividend by an average of 23% per year over the past 5 years.
Telenor is also something of a rarity among European companies — it’s a serial share repurchaser. Telenor is committed to repurchasing about 1% of its shares this year after reducing its share count by about 3% in the preceding two years.
Dividend Yield: 5.1%
Next on the list is French oil major Total SA (TOT). Total raised some eyebrows last month as discussions progressed to develop Russia’s massive shale fields in partnership with Lukoil (LUKOY). It appears that, despite the ongoing threat of sanctions from the United States, business is going on as usual in the real world.
Total, like the rest of Big Oil, has had a rough run of late. With energy prices trading mostly sideways and with global economic growth tepid at best, revenue growth has been sluggish.
Yet at current prices, it would seem that investors are being a little too bearish. Total’s share price is still 23% below its old 2008 high, and the stock — at 1.5 times book value — trades at about half of its pre-crisis valuation.
Am I wildly enthusiastic about the business prospects for Big Oil in the year ahead? No, I’m not. But the sector seems to be pricing in the worst-case scenario, so any outcome other than a global recession or a total collapse in the price of oil should bode well for energy stocks.
Total yields an impressive 5.1% in dividends. And importantly, it’s also planning to authorize a large share repurchase in the next 18 months.
Dividend Yield: 6%
And finally, we get to one of my favorite long-term holdings, Spanish telecom giant Telefonica (TEF).
Like Telenor, Telefonica is a classic “emerging markets lite” investment in that it is headquartered in a well-regulated European market yet gets the bulk of its revenues from emerging markets. About half of Telefonica’s operating profits come from Latin America. Telefonica also owns about 5% of China Unicom (CHU), China’s second-largest telecom operator.
The Spanish economy is showing signs of life and is expected to emerge from recession once the quarterly GDP data is released. Meanwhile, the sharp depreciation of Latin American currencies that has plagued all multinationals in the region over the past two years appears to have mostly run its course.
All of this bodes well for Telefonica’s business prospects going forward.
Telefonica also made news this week by announcing a partnership with Tesla Motors (TSLA) that will see Telefonica provide in-car wireless connectivity in the U.K., Germany, Netherlands and Spain. While I don’t see this as a major revenue booster, I like that Telefonica is looking beyond its traditional business lines for growth.
Telefonica reinstated its dividend last year and now yields an attractive 6% based on its two-part 2014 dividend. Over its history, Telefonica has been one of the most shareholder friendly companies in Europe, and I expect to see the company raise its dividend as economic conditions in its key markets improve.
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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long TEF. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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