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Dividend Investing Abroad

What Morningstar’s fund analysts are hearing about foreign dividend-oriented stock funds.

Morningstar Advisor, 08/20/2012

The Issues
Whether to increase income as interest rates scrape bottom or to reduce equity risk in a volatile market, investors in the United States have been in hot pursuit of dividend-paying stocks. Funds such as Vanguard Dividend Growth VDIGX, Federated Strategic Value Dividend SVAAX, and Franklin Rising Dividends FRDPX have seen their asset bases burgeon over the past year through May, even as U.S.equity funds overall have lost $125 billion.

Granted, noteworthy domestic dividend oriented funds are still finding opportunities, but there are more plentiful opportunities abroad. Yet, there has not been the same rush into foreign dividend-payers. That may be because even the bluest chips have been embroiled in the European crisis, and plunging stock prices have boosted yields abroad. Indeed, the average foreign large-cap value fund has a 12-month yield of 2.9% as of May 31, compared with 1.4% for the typical U.S. large-value fund.

Still, now may be the time for dividend-oriented fund investors to look to the horizon.

The Points
-Yield is not the end of the story. Investors need to be mindful of what they’re buying. Take SPDR S&P International Dividend DWX. This exchange-traded fund boasts a dramatic 7.3% 12-month yield, one of the highest among foreign mutual funds and ETFs. The fund is also quite risky, however, as its yield screens don’t always exclude distressed companies with plunging prices that push yield up. As a general rule, yields north of 7% warrant skepticism.

-Leuthold’s Doug Ramsey recently pointed out that price multiples in Europe, where many dividend-paying, blue-chip companies reside, trade near multidecade lows. Based on five-year normalized earnings, the MSCI Europe Index sported an average price/earnings ratio of 9.9 at the end of May with a yield close to 5%. This is not that far off the lows seen in early 2009, as well as during the late 1970s and early 1980s. On the other hand, Leuthold calculates that the S&P 500 Index currently trades close to its historical average with a 2% dividend yield.

-Despite the slowing European economy, a number of companies domiciled there are actually raising their dividends. Shore Capital found that nearly 200 of the United Kingdom’s largest companies by market cap increased their dividends by more than 16% in 2011. While dividends have fallen for financial-services companies across Europe, companies outside that sector have generally shown flat to increasing dividends in recent years.

-Such companies can potentially increase dividends because many of them garner a significant portion of their revenues beyond the continent. ABB ABB, a Swiss provider of power and automation products, generates 50% of its sales outside Europe, with 14% coming from China and India alone.

Quotable
“Royal Dutch Shell RDS.A competes with companies like Exxon XOM. But Shell trades at only one times book value and has a normalized P/E of 6.6, versus Exxon at 9.4, with a much lower dividend yield. In the U.S., the trend to buy high yield was very strong last year, pushing up sectors like utilities and [other dividendpaying companies]. Our portfolio is not high yield, but its dividend yield is over 4%, and [the portfolio] is still attractively priced.”
-Gerd Woort-Menker, JPMorgan International Value JIESX

“Just on a pure value basis, European value looks very cheap; even without financials included they look very cheap. But it’s not how to get rich this year. The euro will be much more important [in the short term].”
-Jeremy Grantham, GMO

“The country of domicile is not relevant. It’s really the revenue stream, where the revenues are coming from. As we think about revenues and where the revenues are domiciled, I think our businesses like WPP Group WPP, which has 30% of their revenues coming from emerging markets, they were in the BRIC nations before the term was ever coined, and they are number one in all those nations, and yet they still have 25% in Continental Europe and 12% of sales in the United Kingdom and then the balance is in North America.”
-Steve Romick, FPA Crescent FPACX

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