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Land Of Plenty Discovered For Income Investors

Published 05/10/2015, 02:04 AM
Updated 05/14/2017, 06:45 AM

In the first quarter of 2015, U.S. economic growth came in barely above zero. Similarly, corporate profits have been coming in consistently below estimates.

In both cases, the culprit was the US dollar.

As savvy investors, therefore, we should look to counter this trend. That means searching for investments where currencies have been weak – and where growth and earnings may come in higher than expected.

One region, in particular, provides numerous possibilities for income investors right now, and should definitely not be overlooked…

I’m talking about the eurozone, where prospects have improved recently.

For starters, almost no oil and gas production exists within the eurozone, so the recent decline in oil prices has been economically helpful.

Meanwhile, Greece’s troubles have gotten a lot of press – but the reality is that Greece is a very small part of the eurozone, and it doesn’t much matter whether it stays or goes. Indeed, a “Grexit” would, on balance, be good for the currency, thus improving the discipline of its weaker members and increasing its economic cohesion.

Different Strokes for Different FolksFinally, The Economist‘s team of forecasters estimates growth of 1.4% in 2015 and 1.7% in 2016 for the euro area, which isn’t stellar, but is above the recent average.

Now, the economies of the eurozone still aren’t integrated like American states, meaning there’s a big difference between the disparate eurozone countries when it comes to the availability of good investments.

In Germany, for example, even the dullest utilities carry yields of only around 3%. That may look attractive to German investors who have to suffer from a domestic 10-Year government bond yielding about 0.4%, but it doesn’t suit us red-blooded Americans.

Luckily there are attractive buys in other countries, and we don’t even have to venture into Greece or other areas where the economics are wild and woolly.

One reminder: Most European companies withhold tax, typically at a rate of about 20%, on the dividends they pay… but this withholding tax can be offset against U.S. income tax. That means European dividend stocks aren’t very attractive holdings in tax-free accounts, such as IRAs – but in taxable accounts, there’s little disadvantage to European dividend income versus its U.S. counterpart.

Here are some European stocks from different countries and sectors that might be attractive to income investors:

  • Electricite de France SA (OTC:ECIFY) is France’s state-controlled electric utility. It benefits from France’s highly successful program of nuclear power stations, which produce 80% of the country’s electricity. After a couple of years of eccentric economic policies, France has pulled itself back to the European norm, and Electricite de France should benefit from the modest economic recovery observers foresee (The Economist’s team of forecasters sees 1.1% growth in 2015 and 1.5% in 2016). Based on last year’s dividends, the stock yields 6.5% and is trading at 13x historic earnings.
  • Delta Lloyd (AMS:DLL) is a retail banking, pensions, and insurance company in the Netherlands, Belgium, and Germany. Founded in 1807, the company’s revenue has grown to 14 billion euros ($16 billion) today. It’s currently trading at about book value, as well as 10x trailing earnings, and just 8x forecast 2015 earnings. Based on 2014’s dividends, the shares yield 6% (the final dividend of €0.61 goes ex-dividend on May 25).
  • Banco Santander (MADRID:SAN) is Spain’s largest bank, with major operations in Britain and Latin America. It’s currently trading around book value, on a P/E of 14.5x based on last year’s rather depressed earnings, and at 13x based on projected 2015 earnings. Unlike most European companies, it pays dividends quarterly. Based on its current dividend of about $0.125, it yields a juicy 6.7%.
  • Fortum Oyj (HEL:FUM1V), a Finnish company, generates, distributes, and sells electricity and heat energy in the Nordic region and Russia. Fortum supplies 2.3 million Scandinavian customers with its hydro, thermal, and nuclear power operations.

Recently, the company divested its Swedish distribution business, which is expected to yield a one-time profit of five euros per share in the second quarter of 2015. It’s on a favorable rating, selling at 5.5x historic earnings, though it’s also trading at about 12x estimated 2015 earnings, excluding the one-off gain. Based on its historic dividend of 1.1 euros per share, it currently yields 6.1%.

Bottom line: U.S. investors should have part of their money in European shares for diversification purposes. Plus, as U.S. income investors with taxable accounts, we can buy European shares with little tax disadvantage. The above examples show that attractive values can be found – not to mention that U.S.-based investors may benefit even further if the euro recovers against the U.S. dollar.

Good investing

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