Beaten-Down Stocks in Europe May Provide a Great Source of Income

by Jason Jenkins

In August, European Central Bank (ECB) President Mario Draghi gave Europe a sense of hope when he said, “The ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.” He followed up on that promise when the ECB released their new program, the Outright Monetary Transactions (OMTs).

Earlier this month, I wrote an article pointing out a few of the details of this monetary policy, which some are hailing as the Union’s messiah. Here’s a quick summary:

  • The ECB will be able to buy unlimited bonds so they can shore up markets.
  • If the ECB buys your bonds, you have to fall in line and follow their fiscal guidelines.
  • Germany’s initial response, to put it lightly, was not supportive, but it’s not shared by everyone.

But it’s a Catch-22. The ECB’s plan to buy as much of the shorter-term debt as needed was seen as the “bazooka” – everyone loves this analogy – to get its house in order. But those countries applying still have to agree to follow some sort of “austerity” as approved by the rest of the Union. Seems like we’ve been here before…

A Little More Light At the End of the Tunnel – Hopefully

Last week there was another obstacle that a lot of people weren’t talking about. On September 12, the German constitutional court had to decide the conditions for final legal approval of the European Stability Mechanism (ESM). The ESM would establish a permanent rescue fund for the EU.

The court gave its blessing and now it seems that Mr. Draghi’s dreams are still on course. And the optimism keeps on keeping on…

The Organization for Economic Cooperation and Development’s (OECD) Chief Economist, Pier Carlo Padoan, told Bloomberg Radio right after the decision, “Now we can say that Europe has in place a powerful backstop in terms of financial support. It does not fix the problem, but certainly it is very important progress.”

Time to Look for Opportunities

You should always be looking for opportunities where others are avoiding. It should be the contrarian in you. Every security in Europe isn’t bad just because Europe’s political theater is dysfunctional. Just like many money managers out there, you want to try to maintain a diversified global portfolio. And that being the case, there are a lot of beaten-down European stocks out there.

But, as always, you have to be smart. Some stocks have been knocked around because they deserve to be. But you can get a little hedge against volatility through looking for shares of cheap European companies that are going to give you a regular dividend. They are out there.

First Focus on Dividend-Paying Multi-Nationals

Last week, MarketWatch quoted Weyman Gong, a principal at Signature, a wealth management firm in Norfolk, Virginia: “This dividend-paying stock segment is the most stable in the market.” Gong has stated that he’s staying put with what’s in his portfolio now.

These are companies in Europe with a broad international influence. Some of his portfolio members listed in the United States are:

  • British American Tobacco PLC (NYSE: BTI)
  • Philip Morris International Inc. (NYSE: PM)
  • Nestle SA (OTC: NSRGY.PK)
  • Unilever PLC (NYSE: UL)

But Also Consider the Risks…

Julian Pendock, Chief Investment Officer at London-based Senhouse Capital, states, “Dividends in Europe are more attractive than elsewhere, but should be given higher levels of risk and uncertainty going forward because markets are all driven by politicians and central bankers. There are some excellent higher-yield companies around, but one has to be discerning about risk.”

Will James, a European-stock fund manager at Standard Life Investment based in Edinburgh, believes that the doom and gloom predictions are a bit over the top. He went on to say that, “It’s not as bad as the headlines suggest. You have companies across Europe that have very strong balance sheets and don’t have to go to the debt markets.”

James noted that many companies have posted meaningful dividend hikes and plan to continue dividend growth payout. They include such companies as:

  • Oesterreichische Post AG (OTC: OERCF.PK), which handles the mail in Austria. Currently, it’s yielding 7%. James expects the dividend to grow about 5% every year.

  • Eni SpA (NYSE: E) is an Italian multinational oil and gas company that Matt Carr has written about for Investment U before. It has already made the announcement that it will increase its dividend to keep in line with inflation. The last boost was about a 3.5% increase and it’s currently sporting a 6% dividend.

James also stated that it isn’t so bad to go after companies with lower yields if you follow an investing strategy kind of like Warren Buffett’s “moat” strategy.

He believes it’s worth the trade-off if it’s a strong franchise, the industry is difficult to enter, and the company possesses a virtual monopoly or control of a limited market. All this gives the company a steady cash flow.

The example he provided was Novo Nordisk A/S (NYSE:NVO). It’s a Denmark-based health care company that produces diabetes care equipment and medications. It also focuses on other areas, such as hemostasis management, growth hormone therapy and hormone replacement therapy.

The company has increased its dividend 40% in a year. And Novo Nordisk AS has been consistent with its dividend increases. The dividend has been increased yearly since its IPO 11 years ago.

James concluded by saying, “If I can get a 4% dividend yield from that company and it will be here in four years’ time, I’m going to get a fairly attractive total return.”

If you do your due diligence, I think you can find income bargains almost anywhere throughout Europe. Stay tuned as our experts share their most profitable findings…

Good Investing,


Editor’s Note: Back in June, my colleague Ryan Fitzwater recommended investors take a close look at beaten-down European automaker Volkswagen (OTC: VLKAY.PK). Since we published the article the stock has risen almost 20% - and it’s still dirt-cheap, trading at just about five times forward earnings and even with its book value.

For Ryan’s original report on a quality multinational brand that’s been beaten down by the mass exit of European stocks, click here.

comments powered by Disqus