By The Sizemore Letter
Vive la France!
With ECB President Mario Draghi and Fed Chairman Ben Bernanke in a monetary arms race to see who can inject more liquidity into the global financial system, global equity markets should enjoy a spectacular finish to the year. And with Bernanke determined to keep short-term rates at near 0% through 2015, dividend-paying stocks should continue to be attractive to income investors for years to come.
Draghi’s Big Bazooka and the German Constitutional Court ruling mean that we won’t be seeing a Eurozone meltdown—at least not yet. Meanwhile, most European markets are priced far more attractively than their American counterparts, and most pay significantly higher dividend yields.
Most of the attention has been focused on the “problem children” of the European periphery—Spain, Italy, Greece, and Portugal—and on their stern schoolmistress Germany. But France is the second-largest economy in the Eurozone and home to some of its biggest and most globally-recognized companies.
At first glance, French stocks would appear to offer value. By Financial Times’ estimates, French stocks trade for 14.3 times earnings and yield 3.7% in dividends. Not bad, given that American stocks are priced at 16.2 times earnings and yield only 2.1% and that growth prospects on this side of the Pond are tepid at best.
Investors wanting “one-stop shop” access to French stocks can buy shares of the iShares MSCI France ETF (NYSE:$EWQ). But today, I’m going to recommend five solid dividend-paying French stocks that should allow investors to profit from the reflation of Europe while also collecting a nice dividend check every quarter.
I’ll start with French oil major Total SA (NYSE:$TOT). Total is one of the largest integrated energy companies in Europe with more than 11 billion barrels of proven reserves. The company also owns interests in 20 refineries scattered across Europe, the United States, China, and the French-speaking regions of Africa and the Caribbean and operates a network of nearly 15,000 gas stations.
Total is a globally-diversified energy firm trading at a very reasonable price of 7 times expected 2013 profits, and it yields a handsome 4.3% in dividends.
I expect energy prices to stay relatively firm given the massive amount of monetary stimulus in play. But even if I am wrong, Total is priced attractively enough to absorb any sustained weakness in energy prices.
Next on the list is French mega pharmaceutical company Sanofi ($SNY). Sanofi has its hands in just about everything, though it is particularly strong in its diabetes and cancer drugs and in treatments for heart disease and kidney disease. The company also has a presence in the veterinary pharmaceutical market.
Sanofi’s stock more or less tracked its Big Pharma peers through early May of this year before selling off sharply along with most European shares. The stock has rallied hard, however, and is now nearly 8 points ahead of the broader iShares Health Care ETF (NYSE:$IYH) (see chart).
Sanofi trades for 11 times expected 2013 earnings and yields 3.9%
Next is French luxury powerhouse LVMH Moet Hennessey Louis Vuitton (Pink: LVMUY).
LVMH has been making headlines of late due to news leaking out that the company’s CEO Bernard Arnault—the wealthiest man in France—was seeking Belgian citizenship, presumably as a part of a broad strategy to lower his astronomical tax bill. (Arnault insists that he will remain a French resident for tax purposes; we shall see.)
Whether Arnault’s move is purely motivated by tax or if the wily billionaire has some other business trick up his sleeve remains to be seen. But in any event, it won’t make much of a difference to LVMH and its sprawling global luxury empire.
I’ve held LVMH in client accounts for months, as I view the company to be a fantastic backdoor way to get access to China’s nouveau riche. The company is strong enough to survive any prolonged slowdown without too much damage. (And even if China never fully returns to its old rates of growth, readers should remember that Japan remained the biggest buyer of luxury goods well into its multi-decade, slow-motion depression; a slowdown in China does not necessarily mean lean times for luxury goods firms in the country.)
LVMH yields a modest 2.1% , but its dividend is growing. In just the past two years, its dividend has risen from €1.65 to €2.60—a jump of nearly 60%.
No list of French dividend stocks would be complete without mentioning France Telecom SA (NYSE:$FTE).
I’ve been a fan of European telecom for a long time now, and I hold shares of Telefónica (NYSE: $TEF) and Vodafone (NYSE:$VOD) in client accounts. I consider both to be excellent long-term plays on rising incomes in the emerging markets in which they operate.
France Telecom is less globally diversified than these two peers, but the company is hardly provincial. It is a major competitor in the fast-growing markets of Africa and the Middle East.
European telecom firms have been some of the highest-yielding companies in the world for the past few years, and France Telecom is no exception. The company trades for just 7 times earnings and yields 11.9%.
With a yield this high, it is legitimate to ask: is the dividend sustainable? The company has already trimmed back its dividend forecast this year, and dividend cuts often beget more dividend cuts. But with credit conditions in Europe easing due to Mario Draghi’s “doing whatever it takes,” I believe France Telecom will have a lot more flexibility to sustain its dividend. But given that its payout ratio is nearly 90%, I wouldn’t expect too much in the way of dividend growth.
Finally, we come to French food and dairy products company Danone (Pink: DANOY).
It’s hard to see how a yogurt company like Danone can be considered part of a “strategic industry” vital to France’s national interests as former president Nicholas Sarkozy seemed to think (Sarkozy blocked its acquisition by PepsiCo (NYSE:$PEP) on these grounds), but Danone is a fine consumer staples company with a strong presence in the fast-growing markets of Africa, Asia, and Latin America. Danone ranks 1st or 2nd in most regions in which it operates for both fresh dairy products and infant nutrition.
Given its perceived safety, Danone is a little more expensive than the other stocks reviewed, trading for 16 times expected 2013 earnings. Still, the company yields an attractive 2.8% in dividends and gives investors great backdoor access to several key emerging markets.
Disclosures: Sizemore Capital is long LVMUY, TEF, and VOD.
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