NEW YORK (Reuters) – Lured by a combination of cheap prices and high dividend yields, some money managers are finding opportunities in Europe’s drawn-out financial crisis.
Indeed, these managers are swapping their holdings of U.S.-based global industrial companies like General Electric, for companies like Germany’s Siemens AG. Others are increasing their exposure to European dividend-paying stocks and trimming their portfolios of utilities and health care companies in the U.S. that have become favorites of dividend and non-dividend investors alike.
It’s a strategy built, in large part, on the popularity of dividends among U.S. investors. With 10-year Treasury notes offering a historically low yield of 1.9 percent, many income investors are turning to cash-rich companies, like PepsiCo and Microsoft, that come with yields higher than 3 percent and offer the possibility of share price gains.
Yet the market’s recent infatuation with dividends has made some high-yielding sectors, like utilities, trade at higher price-to-earnings valuations than the broad Standard & Poor’s 500 Index.
“There are less profits to be made when everyone is thinking the same thing,” said Dave Abate, a senior wealth adviser with Strategic Wealth Partners in Seven Hills, Ohio.
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Here are suggestions for crafting a high-yielding stock strategy that favors international companies:
THINK GLOBAL
Some fund managers suggest that replacing American companies with their European counterparts can be a smart long-term bet.
Dale Winner, a co-manager of the $360 million Wells Fargo Advantage International Equity fund, said that recessions and high unemployment in Europe have created a lucrative environment for stock pickers.
“There’s lots of skepticism about Europe due to the sovereign crisis and questions about the banking sector, and that has created valuation anomalies,” he said.
Winner is particularly interested in the industrials, energy and insurance sectors. Germany’s Siemens AG, for example, makes everything from household appliances to ultrasound devices used in hospitals worldwide. It trades at a price-to-earnings ratio of 14.5 and yields 4.3 percent. Its U.S. competitor General Electric, meanwhile, trades at a ratio of 16.2 and yields 3.4 percent.
“These are both global companies, yet the macro concerns in Europe are making Siemens more attractive,” Winner said.
He cites a similar price-to-earnings discount for German insurer Allianz SE, which yields 5.3 percent, compared with U.S.-based Allstate, which yields 2.6 percent.
Investors who buy these European companies and hold them for more than three years stand to benefit from income now and price appreciation after Europe’s fiscal problems are solved, he said.
Madelynn Matlock, manager of the $291 million Huntington International Equity Fund, said she is increasing her exposure to European dividend-paying companies that are growing their earnings and payout ratios. She especially likes companies based in the UK.
“Different countries have different dividend-paying traditions, and these (UK) companies have a tradition of paying more than others,” she said.
Among her positions are Unilever, GlaxoSmithKline and Tesco PLC.
“These are all comparatively better than you can find in the U.S., on average,” Matlock said.
Unilever yields 4 percent and trades at a price-earnings ratio of 17.8. Through Wednesday’s close, its shares had fallen 1.9 percent since the start of the year. GlaxoSmithKline yields 5.5 percent and trades at a ratio of 14.4. Its shares are up 9.7 percent in the year so far.
And grocer Tesco PLC yields 5.1 percent and trades at a price-earnings ratio of 8.7. Its shares are down 21.2 percent for the year, in part because of concerns about profit and a decision by Moody’s to cut its credit ranking by one notch to Baa1.
Yet some analysts are optimistic about Tesco’s prospects.
James Grzinic, an equity analyst at Jefferies, said in an April 25 note that he expects “major scope” for Tesco’s expansion in 2013 if its turnaround is successful. He rates the company a buy and has a price target of 400 British pounds for the stock; that’s 26 percent more than its Wednesday close of 318 pounds.
BROAD APPROACH
Strategic Wealth Partners’ Abate, concerned about the valuations of dividend-paying stocks in the U.S., is gradually moving more of his clients’ assets into European companies.
“In the U.S., the yield of the S&P; 500 is around 2 percent. Internationally, you can easily find (yields of) 4 to 5 percent,” he said.
Abate typically finds ETFs are an easier way to find high-yielding companies, compared with investing in individual shares. His favorite option is the iShares Dow Jones International Selective Dividend Index, a $947 million ETF that yields 5.1 percent and has an expense ratio of 50 cents per $100 invested. Sixty-two percent of its assets are in European stocks, according to Morningstar. The rest are spread mostly between Australia, Japan, and Canada.
“This is a very cheap way to get into this space and get exposure to roughly 100 companies,” he said.
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The companies in the fund have an average forward price-to-earnings ratio of 10.7 percent and offer dividend yields of 6.3 percent. Its largest holding is Commonwealth Bank of Australia, followed by Italy’s Eni SpA and the U.K.’s British American Tobacco.
(Editing by Walden Siew and Bernadette Baum)