Strategy
Investment Opportunities in PIIGS
For the past few months the Greek debt crisis has been the focus of investors worldwide as the major European countries try to figure out a solution to solve the crisis. Due to politics and the integration of many countries under the common currency, the crisis does not appear to end very soon. In addition to Greece, Portugal, Ireland, Italy and Spain (collectively dubbed as PIIGS by traders) are also suffering from high deficits.
Despite the current chaos in the European Union, some good investment choices can be found in these countries. An article in the latest edition of Bloomberg BusinessWeek lists a few stocks from PIIGS that are liked by fund managers.
The stocks listed in the article are noted below:
1. Portugal
Energias de Portgual (OTC: EDPFY) is an electric and natural gas utility with strong presence in Spain, Portugal, France and Belgium. Its alternative energy subsidiary EDP Renovaveis has wind energy projects in the early stages in Illinois, Indiana and Ohio. The current dividend yield is 5.15%.
Portugal Telecom (PT) offers telecom services in Portugal, Brazil and a few countries in Africa. PT pays a dividend of 7.10%.
2. Ireland
The holding company DCC which has interests in food, energy and health care. DCC is not traded on the US markets.
3. Italy
Ansaldo Sts Spa (OTC: ASDOF) is a builder of railways and subways. The company earns more than 50% of its revenues from outside of Italy and has a strong backlog of orders.
4. Greece
National Bank of Greece (NBG) does not pay regular dividends. The stock has fallen heavily in recent months and closed at $3.95 today.The bank’s deposits exceeds loans.
5. Spain
The telecom giant Telefonica(TEF) gets a significant portion of its revenues from Latin America. Telefonica’s current yield is 6.34%.
Banco Santander (STD) also gets more than 50% of its profits from outside the Euro zone. The stock pays a 5.26% dividend. Santander has large exposure in North and South America. In the US, it bought the Sovereign Bank during the credit crisis in 2008.
In another article titled The Pain in Spain falls Mainly on the Cajas, author Mark Scott notes that the main reason the Spanish banking giants Banco Santander (STD) and BBVA (BBV) remain strong despite the troubled economy is that bad real estate loans have hit mostly the the non-profit lending institutions known as Cajas. Hence investors need not totally avoid Santander and BBVA.
Why Diversification Still Matters
I posted The Importance of Diversification chart last year in an article on Callan charts. In 2008, diversification across countries did not work well for investors as the majority of stock markets fell. However that does not mean diversification is dead. Diversification still matters. One can diversify by not only investing in different countries but can also diversify picking various sectors within a country. The following charts show the importance of diversification:
Click to enlarge
1. Periodic Table of Style Rotation — Why Diversification Matters
2. Periodic Table of Sector Rotation — Why Diversification Matters
3.Annual Returns for Key Indices - 20 Years (1989-2008)
The IFA Periodic Table of Investment Returns
For the pdf versions, click here and here.
10 Reasons to Invest in Foreign Stocks
Most American investors have low exposure to foreign equities in their portfolios. There are many reasons for this type of asset allocation strategy. One of them is that financial advisors recommend putting just 10% to 20% of one’s assets in foreign equities. Another reason is due to the “home country bias” inherent in all of us. Americans prefer US-based companies than foreign ones because they know those companies better, those companies advertise heavily in the media, they sponsor community social/charity programs, etc. Some consider it to be even patriotic to invest in US companies.
Some investors think that foreign markets are very risky due to political issues, lack of transparency, accounting methods, lack of publicly available information, currency risks, lack of regulations, etc. While most of these factors are true, in my opinion foreign companies are getting better and are no more riskier than US companies. One can find risky companies anywhere whether it is a bio-tech start-up based in China or a gold miner such as Bre-X in Canada or an IT firm like Satyam based in India. However there are many excellent foreign companies that are as good as any large US company that US investors can consider adding to their portfolios.
The following are Ten Reasons to Invest in Foreign Stocks:
1. Investing globally offers diversification for a portfolio. In this age of globalization diversification is not complete if one invests just in US companies. One can argue that foriegn stocks are not required in a portfolio since about half the earnings of S&P 500 companies comes from overseas revenue. But that does not mean one is diversified enough just putting their money in an index fund tracking the S&P. Overseas companies operate under different dynamics than US companies and the only way to capture their growth is investing in them. As mentioned above, financial advisors also suggest adding some foreign equities for diversification.
2. Going abroad can offer better returns to investors than staying with only US stocks. For example, the S&P500 was up 23.5% last year. But emerging markets such as Brazil, India, Russia, China were all up 82%, 81%,79% and 111% respectively.Among the developed markets, Australia was up 30% , Sweden was up 43% and The Netherlands was up by 36%. Other Western countries such as France, UK, had similar returns like the US S&P500. America’s largest trade partner Canada was up by 30%. The US market performance in the past decade was dismal as I discussed here.
A quick review of Callan’s Chart for developed markets reveal that US stock returns have been average to less than average relative other markets. The S&P 500 was never the top ranking performer among the developed market indices in any year between 1970 to 2005.
3. Americans already own their homes in the US. Hence they must have higher exposure to foreign markets to counteract the heavy exposure to the U.S. assets. In addition, it is possible that all US-based assets such as homes, stocks and interest rate on bank deposits can all go down at the same time like it occurred since the credit crisis. So investing overseas provides diversification as well as reduces the risk of putting all eggs in the same basket.
4.The US dollar may fall further this year due to sluggish economic growth here. If ones believes in this view, then one can invest in foreign equities as the return on foreign investments will be amplified when currency exchange value is taken into account.
5.The total market capitalization of all the world’s stock exchanges is $45.4 Trillion as of Nov, 2009. The US markets (NYSE and NASDAQ) account for just about $14.5 Trillion.(Source: World Federation of Exchanges). This shows that more capital is flowing to markets outside the US and plenty of investment opportunities exist in other countries.
6. Thousands of publicly listed companies trade outside the US. Out of the total 45,826 listed companies wordwide in November 2009, only 6,066 trade in the US exchanges. That is just 13% of all public companies available for investment.(Source: World Federation of Exchanges). So investors have a large universe of companies to choose from by looking outside the US borders. Many of the world-class companies such as Nokia (NOK), Vodafone(VOD), Toyota(TM), BASF(OTC: BASFY), Nestle(OTC: NSRGY), Unilever(UL, UN), Danone(OTC: DANOY), ABB(ABB), etc. are based in other countries.Some emerging market firms such as Tata Motor(TTM), Petrobras (PBR),Gazprom (OTC: OGZPY), etc. are also turning into global players.
7. Many foreign markets have higher dividend yields than the US S&P 500. The S&P 500 has an average yield of about 3%. In many developed markets such as Singapore, New Zealand, Australia, France, UK, Germany, etc .the dividend yields are higher than 3% with some exceeding 5%. So US investors can earn more by buying foreign stocks.
8. The current estimate for US Economic growth this year is lower than most developed and emerging markets.
9.The current US business management style is not as great as it is hyped up to be. The credit crisis is a classic example that showed that all the risk management controls in companies were ignored by those in charge or simply did not exist.This was true especially in the banking industry.Many large European companies are shareholder friendly and strive to make things better for all the stakeholders in the firm.Sure there were some European firms such as Royal Bank of Scotland(RBS) which abandoned its core principles and let down its investors. But there are many more companies that are well run and are world champions. In emerging countries, managements work harder due to lack or proper infrastructure, political corruption and myriads of other problems in order to attract capital and achieve growth by following sound management techniques. Compared to those companies, I think managers in US companies have become lazy and do not work as hard to better serve their stakeholders. One reason could be the culture that has changed so much in the past few decades leading many executives to worry only about their own earnings, stock options, golden parachutes, etc. than about anything else. Corporate boards have also become complacent in performing their fiduciary duties to the firm.
10. The population in the US is relatively small compared to the population of developing countries such as India and China. In the US, the majority of the working population is experiencing negative to flat growth in income levels compared to rising household income in many countries. Hence the demand for goods and services will go down in the US if the job and income levels do not improve. With their 401K retirement accounts down, mortgages underwater, wiped out home equity and low saving rate it is highly unlikely that that American consumer will do the heavy lifting for the US economy as in the past. This is in sharp contrast to the developing world and most of Europe where the economy is in much better shape.
Earlier:
Why should you invest in Foreign Stocks?
Why Should You Own Dividend Paying Stocks?
Is Global Diversification Dead?
Foreign Stocks Beat US Stocks Easily Over Long-Term
For many years US investors turned to foreign stocks for their higher returns, stability and better diversification. Foreign stocks especially European stocks have high dividend yields which helps in the long-term due compounding of returns. An investor who just invests in US equities and ignores foreign stocks will not realize the maximum returns possible.
In the column, What happens if Dollar Crashes BusinessWeek presents an interesting chart that shows the performance of an S&P 500 portfolio vs. a global portfolio.
From BusinessWeek:
“The dollar is in its eighth straight month of decline against other major currencies. An easy way to hedge a portfolio against continued and possibly deep losses is to increase your exposure to international companies less affected by a volatile U.S. currency. Since 1970 a global portfolio has outperformed the Standard & Poor’s 500-stock index.”
A $10,000 investment in a global portfolio in 1970 would have grown to about $500,000 in 2009 compared to about $410,000 only if invested in an S&P 500 portfolio.
Among US stocks, small caps perform much better than large caps over the long-term as the chart shows below.
From 1926 thru 2006, small caps grew four times higher than large caps. Stock also easily outperformed government bonds and T-Bills in the same time period. In this 83 year period, stocks outperformed bonds easily.
Doubled Dividend Stocks
Many companies raise the dividends on their common stock year over year.There are some stocks whose dividends have more than doubled in six years. In this article lets review ten such international stocks and see how they have fared so far this year.
For this study, the stocks were analyzed using the following criteria:
1. Use only Non-Financial stocks.
2. Dividends must have doubled or more than doubled in the past 5 years .
3. Stocks that cut or reduced dividends in those five years do not qualify.
4. All stocks must be foreign stocks.
5. Evaluate only common stock.
6. Exclude tax and currency fluctuations.
5-Year Historical Dividend Growth Rate
| Company | Ticker | 5-Year Dividend Growth Rate |
|---|---|---|
| Magyar Telekom | MTA | 52.45% |
| Veolia Environnement SA | VE | 17.08% |
| Portugal Telecom | PT | 42.71% |
| Telecom Corp. of New Zealand Ltd. | NZT | 12.09% |
| Sasol Ltd. | SSL | 16.14% |
| Eni SpA | E | 20.99% |
| EnCana Corp. | ECA | 45.28% |
| British American Tobacco plc | BTI | 12.87% |
| Telefonica SA | TEF | 24.57% |
| Repsol YPF SA | REP | 32.59% |
Magyar Telecom has the best 5-year dividend growth rate of 52.45%.The second best dividend grower is Encana (ECA) from Canada at 45.28%.
Ten Dividend Doubled Stocks Year-To-Date Change and Current Dividend Yield
| Company | Ticker | Year-To-Date Change | Current Dividend Yield | Sector | Country |
|---|---|---|---|---|---|
| Magyar Telekom | MTA | -7.24% | 9.89% | Telecom | Hungary |
| Veolia Environnement SA | VE | -50.09% | 4.16% | Water Utility | France |
| Portugal Telecom | PT | -21.77% | 8.78% | Telecom | Portugal |
| Telecom Corp. of New Zealand Ltd. | NZT | -40.10% | 11.31% | Telecom | New Zealand |
| Sasol Ltd. | SSL | -11.22% | 2.10% | Chemicals | South Africa |
| Eni SpA | E | -19.11% | 6.89% | Oil and Gas | Italy |
| EnCana Corp. | ECA | -1.08% | 2.56% | Oil and Gas | Canada |
| British American Tobacco plc | BTI | -14.61% | 2.64% | Tobacco | UK |
| Telefonica SA | TEF | -23.69% | 5.21% | Telecom | Spain |
| Repsol YPF SA | REP | -27.16% | 5.51% | Oil and Gas | Spain |
Note: Data listed above are thought to be accurate at the time of posting.Do your own research before making investment decisions.
Analysis:
1. The above list is dominated by Telecom and Energy (oil and gas) stocks. While the oil and gas stocks are to be expected due to rising prices in the past few years, the telecom sector is a surprise.
2.MTA and NZT have current high dividend yields. New Zealand stocks are known for their high dividend payouts. So the lone Kiwi stock listed in the US made it to the list.Magyar Telecom is a consistent stable performer from Hungary. The other telecom stocks TEF and PT have above average dividend yields as well.
3. Due to rising crude oil and natural gas prices in the past years, energy stocks have had tremendous runs.Except the Canadian oil and gas producer Encana, the Spanish company Repsol and Italian Enel have high current dividend yields .
4. The French utility Veolia has a decent dividend at 4.16% but the stock is down over 50% this year. Probably a good entry point at the current price.
5.Though Sasol is classified as an oil and gas stock, this South African major has interests in the chemical business also.Sasol is now in its growth phase with the company announcing a R70B expansion plans for the next three years. The projects will be undertaken in countries like Nigeria, Qatar, Papua New Guinea.
6. British American Tobacco, BTI is a UK based company engaged in the tobacco business with brands like Dunhill, Kent, Lucky Strike, etc. BTI is an international tobacco play.Recently BTI expanded operations in Turkey after a major acquisition there. Some of its competitors are the American Phillip Morris International (PM) , Imperial Tobacco(ITYBY), etc. With a decent yield, BTI is a long-term growth stock.
The above ten non-financial stocks are worth watching thru the rest of the year and in the future due to the attractive dividend yield and past dividend increases.
Global Trade Facilitators - Part I
There are thousands of companies which facilitate trade among countries. They help move goods from producers to consumers in the most efficient,fastest and cheapest ways possible. Billions of dollars worth trade occurs on a daily basis between partner countries. One way to profit from this trade system is to identify and locate firms that are involved in this process. Firms in many sectors may fall under this category. Some firms that can be included in this type of firms are in the transportation (shipping, railroads, trucking), courier, chemical, nuclear, food production, consumer goods, defense industry.
In this post, lets review a few companies that help countries trade with one another. I call these companies “Global Trade Faciitators” which is the title of this article. This is the Part I of this theme-based article.
1.How do finished goods like assembled cars, grains like wheat, lumber, minerals get moved from the resource-rich Canada to its largest trading partner US?
One way the above mentioned items are shipped from Canada to US is by two Canadian railroads - Canadian National (CNI) and Canadian Pacific (CP). These two large North American railroads transport all kinds of goods between the countries 24/7 - 365 days a year.
CNI has a dividend yield of 1.64% and a P/E of 13.3. S&P has a 4 star rating on this stock and CNI should generate more profits due to the opening of Prince Rupert Terminal late last year to capture overflow traffic from the LA and other western ports. Bill Gates bought a major stake in CNI a couple of years ago.
CP is a $9B company that operates in the western provinces. Some 50% of the shares of CP are held by institutions. It has an yield of 1.47% and S&P has rates it a 3 star stock.
2. How does a supplier in Shenzen, China ship an important business document (hard copy) to a buyer in Sao Paulo, Brazil?
Courier companies like Fedex(FDX), UPS Inc (UPS), DHL can help this Chinese supplier. Another company that can get the document all the way from Shenzen to Sao Paulo is TNT Express. This Netherlands based company’s stock used to trade on the NYSE. Now it trades on the OTC a TNTTY.
TNTTY has a dividend yield of 2.81% and has a market cap. of $14B.
3. How can a Swiss company benefit by offering its products and services to - say a country like China, India or Bolivia?
A Swiss giant like ABB can sell its power grid equipments and other infrastructure goods and services to developing and less developed countries and profit vastly from it.
ABB is a world leader in the infrastructure space.It can help countries electrical systems, build and operate power generation plants, automate train control systems etc. Motley Fool calls ABB - “The Little-known Massive Bluechip”.
ABB has a yield of 1.85% and a PE of 14.76
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