U.S. dividend investors should think outside the box in finding undervalued dividend stocks. Nearly one-third of our Top 100 stocks are located outside the U.S and trade as ADRs, or American Depository Receipts. Foreign stocks now provide higher dividend yields than their U.S. counterparts, especially in Europe. Although many of these ADRs have infrequent trading and also tax implications, it is well worth casting your net across the world to find dividend gems.
French ADR Dividend Stocks
Above is the chart of the CAC40 index versus the Dow Jones Industrial Average. As you can see, French stocks have underperformed by a sizable margin, especially since early last year. In examining French stocks, I ran a screen of those companies that pay a yield that is higher than 2.5 percent and has a market cap above 15 billion:
|BNP Paribas SA||72.67B||4.45|
|Air Liquide SA||41.55B||2.51|
|Schneider Electric S.E.||37.95B||3.11|
|Société Générale Group||34.784B||4.32|
|Credit Agricole S.A.||33.85B||5.03|
Owning these stocks through ADRs also enhances risk through currency movements. If the U.S. dollar goes up, the value of your foreign holding goes down. This has had an impact on many international funds for the last several years, as those that were unhedged against the dollar have substantially underperformed those funds that are hedged. Examine the chart of the WisdomTree International Hedged Quality Dividend Growth Fund versus the WisdomTree International High Dividend Fund. The hedged product has far outperformed its unhedged counterpart.
One item of note for the country and the European Union is French election risk. The specter of a Le Pen victory has haunted the European stock rally for 2017. While most polls have Le Pen losing in the May 7th runoff election, investors are worrying of a Trump like upset. This could lead to France’s exit from the single currency, and perhaps the European Union as a whole.
Despite the short-term risks, most investment analysts expect Le Pen to lose and stock valuations to rise as Europe catches up with the U.S. In fact, nearly 70 percent of European fund managers in the Bank of America Merrill Lynch survey foresee positive economic momentum over the next twelve months in Europe. The odds are high that foreign stocks will outperform the U.S. over the next several years as valuations in Europe are well below that of the home market. According to data from Bloomberg and Factset, firms in Europe’s Stoxx 600 benchmark trade at 14.4 times estimated earnings versus 17.4 for U.S. firms within the S&P 500 stock index. France is even cheaper. The average price/earnings ratio of stocks in the CAC40 stock index is 12.8. Additionally, there is evidence that when U.S. interest rates rise, the dollar actually weakens. In fact, non-U.S. developed markets outperform 88 percent of the time when U.S. interest rates are being raised by our Federal Reserve.
From the above list, I think there are several worthy candidates for a long-term dividend investor looking for overseas exposure. My first is Société Générale, an ADR that trades under the symbol (OTCPK:SCGLY). The banking giant is one of the largest in Europe with headquarters in Paris. The ADR program has been active in the U.S since July 1993. It primarily operates retail banks in France, although it also maintains a large presence in Russia, Africa, Romania, and the Czech Republic. The banks recent earnings were better than expected as net profits came in at 390 million euros ($417 million). The firm’s capital position also improved. Its tier 1 capital ratio rose to 11.5 percent from 10.9 percent the year before. Its global banking and investor solution segment posted net profits of 432 million euros in the fourth quarter, up from 286 million euros a year ago. International retail operations were strong, up over 50 percent to 438 million euros in the quarter. Russia was a solid contributor to growth through its Rosbank operations. The Russian unit had net profits of 32 million euros in the fourth quarter versus a loss last year. The bank’s international operations were the highlight of last year. Net income for 2016 in this segment was 1.6 billion euros, up over 40 percent from the 1.1 billion euros from 2015.
Given the strong rebound last year, the French banking giant once again increased its dividend. Its dividend was raised in February to 2.20 euros per share for 2017, which is $2.34 in dollars at today’s currency rates. ADR shareholders receive 1/5 of this dividend as the structure is 5 ADR shares represent 1 Société Générale home share. This equates to $0.468 per share for U.S. ADR holders. The dividend ex–date is set on May 20. However, U.S. investors are subject to a French withholding tax of 15%, or $.0702 per share. This reduces the expected dividend, depending on currency translations on the record date, to $.03978. Given the current price of the stock at $9.20 a share, the current yield is 4.32%. This is well above most U.S banks. The firm really stands out not just on dividend, but valuation. Société Générale now trades at a mere 10.2 times expected earnings and a mere 0.6 book value. U.S. banks, on average, are trading at twice this level in price/book terms and close the market multiple of the S&P 500. I think that this is a great time to add a quality high-yielding European firm like Société Générale to a diversified portfolio.
Carrefour (OTCPK:CRRFY) is my second selection in the French market. The firm is a consumer company that is actually the world’s second-largest retailer by total revenue. It is the largest retail firm in France and also has top-three market positions in Spain and Brazil. The firm is global, operating in more than 35 countries. It operates over 13,000 stores worldwide primary in hypermarkets, supermarkets, and convenience stores. Its operations are weighted heavily in France, with 47 percent of revenue coming from its home country. The rest of Europe provides 26 percent of revenue while the Americas and Asia account for the balance. It recently launched an online grocery in Italy 2015 where it maintains a smaller presence and purchased Acquires Rue du Commerce and Dia France in the last three years.
Carrefour maintains over 7,700 hypermarkets, 460 express convenience stores, and 790 regular supermarkets. Revenue at Carrefour rose by 6.2 percent in the firm’s first quarter. Revenue was 21.3 billion euros in the first three months of the year. After years of stumbling growth, Carrefour notched its fifth consecutive rise in revenue. It also guided for near 4 percent revenue growth, in constant currency, for the year. International sales were very strong, rising by 10.9 percent. Brazil was a standout both in growth in sales and also currency. The strengthening in the Brazilian real enhanced revenue growth by about 4 percent. Sales in Italy rose nearly 2 percent while Spain sales growth was flat. In its home market, Carrefour maintained sales growth of just below 1 percent. For the full year, net profit dropped to 746 million euros last year. But overall, sales were positive ex currency, up 3.3 percent.
As with Société Générale, the firm is trading at a very reasonable valuation of