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3 European Dividend Stocks to Buy for Europe’s Coming QE

Here is a little statistic that will blow your mind: 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%; bond yields have been cut by more than half since August of 2012.  As recently as a year ago, yields were over 5%.

And Spain is not alone, of course.  10-year yields in France, Italy and even Ireland are sitting at levels no one would have believed a year ago: 2.1%, 3.3% and 3.0%, respectively.

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 two other closely-tied contributing factors:

  1. Inflation is falling across the Eurozone and risks dipping into deflation.
  2. The European Central Bank is widely expected to initiate some sort of quantitative easing program to combat the risk of deflation.

ECB President Mario Draghi keeps his cards close to the vest, and I have no specific details as to the size of scope of his QE plans.  In his last press conference, he indicated that that QE “had been discussed,” as had a plan to create negative interest rates in the Eurozone. But this much is obvious—while the U.S. Federal Reserve is winding down its QE program and returning to a more normal monetary policy, the ECB is moving the other direction.  All else equal, 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, 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 UK, 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 for yield hunters that I expect will generate significantly better total returns than the S&P 500.

Telenor ASA

The first stock is Norwegian telecom operator Telenor (TELNY).  Telenor has exactly what I like to see in an “emerging markets lite” investment.  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 4.6% dividend, 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.

Total SA

Next on the list is French oil major Total SA (TOT).  Total raised some eyebrows last month by moving forward with plans 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.

Telefonica

And finally, we get to one of my favorite long-term holdings and a staple among portfolios dabbling in European dividend stocks, 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 wireless connectivity in the UK, 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 6.0%. 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.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. 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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Is Dividend Machine JNJ a Buy?

Medical and consumer products giant Johnson & Johnson (JNJ) made a big splash this week by agreeing to sell is Ortho-Clinical Diagnostics business to The Carlyle Group (CG). The diagnostics business, which JNJ founded in 1937, makes blood tests that screen for disease and contributed about 2.6% of JNJ’s revenue last year.

Carlyle was certainly enthusiastic about the deal. Managing Director Stephen Wise said, “We have been focused on the diagnostics industry for many years given its attractive growth prospects, driven by the crucial role it plays in health care decision-making.”

I understand Carlyle’s rationale for the acquisition. The aging of American gives massive tailwinds to virtually the entire medical sector, and blood testing would seem far safer and less subject to political meddling or Medicare and insurance cuts than, say, cutting-edge medical devices or prescription pharmaceuticals.

But I’m left scratching my head as to why Johnson & Johnson would want to part with this business.

It’s not like Johnson & Johnson needs the money. The company has no net debt, and about 10% of the market cap of JNJ stock is cash in the bank.

J&J didn’t release much in the way of detail as to its motivation for selling. My best guess is that, as a relatively small unit responsible for a tiny sliver of JNJ’s revenues, management thought it would make sense focus its energies on the business lines that have the biggest impact on the income statement: pharmaceuticals, medical devices and consumer products.

To put these product lines in perspective, JNJ operates the eighth-largest pharmaceuticals business and the sixth-largest biotechnology business in the world. Its medical devices and diagnostics business is the largest in the world, and its consumer health products business — which sells everything from Band-Aid bandages to Neutrogena skin care products — is the sixth-largest consumer healthcare business in the world.

Suffice it to say, JNJ is a big player in every business line it chooses to enter.

What to Do With JNJ Stock

With Johnson & Johnson in the news — and with JNJ stock continuing its march to $100 per share — is JNJ stock a buy?

Johnson & Johnson is a 128-year-old company that has raised its dividend for 51 consecutive years and counting. It’s also one of only four American companies that sports a AAA-rated credit rating. JNJ is the very definition of a high-quality, blue-chip stock.

Let’s take a look at the numbers:

JNJ stock isn’t particularly cheap, trading at 20 times trailing earnings and 16 times expected forward earnings. But then, given JNJ’s quality and stability, this is a stock that should and generally does trade at a slight premium to the broader market. JNJ stock sported a much higher multiple for most of the past 15 years (Figure 1).

jnj-stock-pe

Figure 1: JNJ price-to-earnings ratio

And while its dividend yield, at 2.7%, is lower than the average of recent years (Figure 2), it’s still high by the company’s standards and significantly higher than the market average. It’s also about in line with the current 10-year Treasury yield.

jnj-stock-dividend-yield

Figure 2: JNJ dividend yield

So, is JNJ a buy? I think it is, but only with the right expectations going into it.

For instance, I own JNJ shares in a handful of dividend-focused portfolios, and I continue to reinvest my dividends. I consider Johnson & Johnson a great core dividend stock.

But I wouldn’t buy JNJ expecting it to massively outperform the market at current prices. At JNJ’s current price, you’re paying a premium for quality, and that’s OK. But I would probably wait for a modest 10%-15% pullback before making any major new purchases.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. 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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After the Stress Test, Are Financials Dividend Growth Stocks?

29 out of 30 isn’t too shabby.  The Federal Reserve released the results for its latest stress test, and 29 out of America’s largest 30 banks met their required capital requirements.  Only Zions Bancorporation (ZION)—a relatively small player—failed to make the cut.

Credit card issuer Discover Financial (DFS) received a clean bill of health and responded much as its shareholders might have hoped—by raising its quarterly dividend 4 cents to 24 cents per share.

It’s been a rough couple of years for bank investors.  After the 2008 meltdown, the government wanted to make sure that it would never be forced to bail out the financial sector again, or at least not on the scale we saw in 2008.  As a result, banks have been forced to reduce leverage, maintain much higher levels of high-quality capital, and—as a means of conserving cash—refrain from making dividend payments or share buybacks.

So, with the Fed’s stress test out of the way, can we expect to see wholesale dividend hikes across the financial sector?

Maybe.  We’ll find out next week—the Fed has an announcement planned for March 26.

The Fed has been pretty good at playing its cards close to the vest.  But based on the results of the stress test, we can handicap the odds that they will allow a dividend hike on a bank-by-bank basis.

Let’s use Bank of America (BAC) as an example. The Fed found that  BAC’s Tier 1 leverage ratio would fall to as low as 4.6 percent under the “severely adverse” scenario, only slightly higher than the regulatory minimum of 4%.   Still, with “excess” capital of about $13 billion, the consensus view is that BAC will raise its quarterly payout from one cent per share to ten cents.  Under this scenario, BAC would yield about 2.3% at current prices.

Citigroup (C), which, like BAC, currently pays out 1 cent per share quarterly, is expected to raise its dividend to about 5 cents.  At current prices, that would give it a yield of about  0.40%.

JP Morgan Chase (JPM)’s annual dividend is expected to rise from $1.52 per share to $1.67 per share, giving it a yield of about 2.8%.

If you’re buying a stock with the specific goal of generating income, none of these potential yields are going to be particularly inspiring.  Though, at least in the case of JPM, the expected yield is higher than what you can expect from the 10-year Treasury.

This brings me to what I consider the single most important issue for any investor in or near retirement.  If you want to keep up with inflation—even the modest 1%-2% variety we have today—you need your income stream to rise over time.  Even a seemingly innocuous 2% inflation rate represents a loss of purchasing power of 22% over the course of a decade.

Standard financial planning will tell you that the solution is to maintain a sizable allocation to equities, assuming that you will sell off about 4% of your portfolio per year.  At a 4% withdrawal rate, you can “safely” assume that you won’t outlive your assets.

Well, that sounds good.  But there is one little problem with it.  The market, as measured by the cyclically-adjusted P/E ratio, is very expensive today at about 25 times a rolling ten year average of earnings.  Corporate profits are also at record highs, and inflation and interest rates are still very low and have little space to fall further.  In this environment, do you want to bet your retirement on capital gains that may never materialize?

A better approach is to use a Dividend Growth strategy as the core of your portfolio.   In an ideal dividend growth strategy, you assemble a  portfolio of stocks that offer a current yield that is competitive with competing income instruments (such as bonds) and—most importantly—offer a strong probability of rising dividends.  As a general rule, I like to see stocks that have at least five consecutive years of rising dividends, and ideally I like to see that they have survived a deep recession with their dividend intact.

On this count, most banks currently fail to make the grade.  Though as the sector emerges from years of government scrutiny and with cleaner, less-leveraged balance sheets, they’re now on my radar.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. 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. This article first appeared on MarketWatch.

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Health Care REIT: HCN Combines Megatrends and Dividends

The normally sleepy world of senior housing REITs got a shakeup on Wednesday with the announcement that Health Care REIT (HCN) and Revera Inc., a leading provider of senior living facilities in Canada, had partnered to purchase and recapitalize Sunrise Senior Living, LLC from affiliates of private equity firm Kohlberg Kravis Roberts & Co (KKR).

Sunrise Senior Living operates 290 senior communities with around 26,400 units in the United States, Canada and the United Kingdom.  Services run the gamut from senior independent living to assisted living to advanced care for patients with Alzheimer’s disease and other memory-related conditions.

The acquisition should be a good fit for HCN, one of the largest REITs in the healthcare and senior living sectors and completes an earlier investment in Sunrise’s property portfolio. HCN currently owns a “little bit of everything,” including senior living communities, medical office buildings, inpatient and outpatient medical centers and life science facilities, and Sunrise gives the REIT better exposure to the biggest demographic investment opportunity of our time: the aging of the Baby Boomers.

Let’s take a peek at HCN’s portfolio.  About 65% of the portfolio is in senior housing, split between properties that HCN operates (40%) and those that are leased on a triple-net basis (25%).  In a triple-net lease, the tenant is responsible for all taxes, insurance and maintenance; the landlord’s only responsibility is to collect the rent check.  Medical office buildings and skilled nursing facilities make up another 15% and 14% of the portfolio, respectively, and the rest is split between hospitals and research facilities.

Impressively, apart from the skilled nursing facilities and hospitals, which depend heavily on Medicare and Medicaid, HCN’s tenants have very little dependence on the government.  Across its portfolio, 82% of its tenant revenues are from private pay clients. That’s a major positive in an era of slashed reimbursements and ObamaCare restrictions.

Looking at HCN stock, we have a REIT paying a 5.6% yield with a long track record of raising its dividend.

An established income payer on the right side of a major demographic wave.  Is there anything not to like here?

I may be nitpicking, but I tend to be biased against the biggest large-cap REITs.  What they gain in economies of scale they tend to lose in lack of focus.  In HCN’s case, I consider its diversified property base to be a mixed bag.  Management would better serve shareholders by picking a single property specialty and by focusing on finding the properties with the highest potential returns on investment within that subsector.

Size itself is also a mixed bag.  While the largest REITs tend to offer greater liquidity and broader tenant  diversification than they upstart brethren, it gets harder and harder to maintain growth at attractive cap rates the larger the portfolio gets.

So, with all of this said, is HCN a buy? I consider it a decent option in a diversified REIT portfolio.  Truth is, there aren’t that many “pure” on the senior living theme.  The deceptively-named Senior Housing Properties Trust (SNH) has about 30% of its property portfolio in medical office buildings

Omega Healthcare Investors (OHI)  is a more focused option, getting virtually all of its revenues from skilled nursing an assisted living facilities.  It also happens to pay one of the highest dividend yields on offer at 6.4% and has doubled its dividend over the past 7 years.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.  This article first appeared on InvestorPlace.

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