When he gazes out over the disarray that is European stock markets, Don Reed sees an enticing opportunity in beaten-down share prices – and those oh-so-generous dividends. Although prices have bounced off their recent bottom, European stocks still offer some eye-popping yields. Portugal Telecom, for example, at 13 per cent, or Spain’s Telefonica S.A. at 8.2 per cent.
But opportunity also means risk – so investors eyeing Europe must be discerning.
Mr. Reed is chief executive of Franklin Templeton Investment Corp. in Toronto and portfolio manager of the globe-traversing Templeton International Stock Fund, whose mandate is to seek value outside of Canada and the United States. He developed his fearless approach to global investing from the late and legendary Sir John Templeton, founder of the Templeton Growth Fund.
“Europe is probably one of the better places to look in the world for yield right now,” Mr. Reed says. “The question is, are you going to be paid that yield?”
Yields that are too high point to danger, the veteran money manager says. Two-year Greek notes were yielding 68 per cent recently; German notes 0.9 per cent, he points out. Clearly, the market deems the higher bond yield to be unsupportable.
While the bond illustration is extreme, discrimination is key when picking through beat-up stock markets such as Europe.
In choosing his investments, Mr. Reed skirts the troubled countries, often called the PIIGS – Portugal, Italy, Ireland, Greece and Spain. So instead of buying Portugal Telecom, with its 13 per cent yield, he bought Telenor Group, the Norwegian telecom company – “Forty per cent of its business is outside the euro zone and the dividend yield is 4.2 per cent.”
As a value manager, Mr. Reed emphasizes that he wants more out of a stock than just yield. His goal is long-term capital appreciation. But generous yields make waiting for a rebound less painful.
At Mawer Investment Management Ltd. in Calgary, analyst Peter Lampert also sees value in European stocks. The Mawer World Investment Fund recently won Lipper Awards for its three-, five-, and 10-year performance in the international stock fund category.
Like Mr. Reed, Mr. Lampert looks for more than high dividend yields.
“We invest in companies with strong business models that generate high cash flow,” he says. “If the dividend is high today, it should be sustainable.”
Mr. Lampert’s top European picks are Vodafone Group PLC and GlaxoSmithKline PLC, both British companies, and France’s Total S.A., a multinational oil company.
“They’re all very global companies that just happen to be headquartered in Europe,” he says. Vodafone has mobile telephone networks around the world, he adds. Its dividend yield is 5.1 per cent, which he believes is sustainable. “The company is well positioned to grow and the management team is focused on maximizing shareholder value.”
Like telecoms, pharmaceutical companies such as GlaxoSmithKline are considered defensive stocks because they generate stable cash flow, Mr. Lampert says. Management is shifting from a heavy emphasis on research and development to selling existing patented drugs in emerging markets. The dividend yield is 4.5 per cent.
Total, the French-based oil giant, yields 6.1 per cent, compared to 2.3 per cent for U.S. multinational Exxon Mobil Corp. “The stock offers very good value,” Mr. Lampert says. Management has a “great track record of earning high returns on capital and paying out dividends to shareholders.”
Mr. Reed of Templeton has found other bargains in Europe, all stocks he has bought for his fund.
“If I’m going to buy some European stocks, one of the things I like is a dividend that is increasing over time,” he says. He found it in a giant Swiss bank, Credit Suisse, yielding about 5 per cent. “If the stock doubles and the yield falls to 2.5 per cent, I’m not going to be too unhappy.”
