Friday, 12 October 2012

High-Dividend Value-Priced European ADR Stocks

A few weeks back we looked at the depressed European equity markets and saw fundamental indicators of enticing pricing. Our review suggested a few ETFs that could be used to buy a basket of those stocks. The alternative of buying individual stocks we examine today, since it is possible to buy shares in European companies in that continent of peace and tranquility (according to the Nobel committee at least) through a security called an American Depositary Receipt (ADR).

What is an ADR?
An ADR is created when a bank buys the stock of a company in its native home market and holds or deposits the shares against which it issues the ADR which is traded freely on US exchanges. Since we Canadian investors can easily trade in US securities, we can buy and sell ADRs too. has a short primer on ADRs and the main bank issuer of ADRS, the BNY Mellon, has a section of its website called DR University that provides more detailed explanation.

Finding the European ADRs
What we would like to find is the difficult combination of high(er) dividend yield in a solid, consistently profitable company that is also reasonably priced. In the interest of building a diversified portfolio, we'll also look for companies in sectors less well represented in Canada and avoid the financials, energy companies and mining companies that dominate the Canadian market.

1) High dividend yield in European companies - The best free source we have found is TopYields. It lists European high-yielders amongst its other listings for every developed market (including Canada). There are individual country listings as well as a top-30 grouping for Europe. All are large to giant companies and many if not most sell their products or services throughout the globe, i.e. an indication of greater stability and success. Along with the current dividend yield, TopYields shows the current Payout Ratio (the percent of Net Income being paid out), which gives a preliminary indication of solidity. If the company is paying more than it earns, that casts some doubt on the sustainability of the dividend, or if it negative, that means the company has incurred a loss. It is also useful to see the Price-Earnings ratio (P/E) - if it is too high, such as 20+, the company is not cheaply priced. Below a P/E of 10, as for some of our results below, the price is definitely getting into cheap territory.

2) Check if the company has an ADR traded in the USA - Go to the BNY Mellon DR Directory page and either search for the name under the alphabetical listing or simply type it into the search box at the top right. Note that not all companies have an ADR. Once found, the company info will include the stock trading symbol.

Assess the company as an investment
Two sites with a lot of useful data on stocks are ADVFN and Morningstar. Type in the stock symbol to get the file on each company. Ratios, multi-year trends and graphs all help build a numerical story about the company. Links to each company's website will lead to investor pages with annual reports and other information to learn about the company and its prospects or troubles.

Sample of stocks that appear promising
Though the picture is not complete, we managed to find without too much trouble fourteen attractive companies across diverse sectors and countries, shown in the table below. All have had net profits in every one of the past five years, a good sign in a region that has suffered economically much more than Canada, though the continuing profitability often reflects their worldwide reach too. Dividend yields of 3+% in what look to be healthy companies will appeal to many investors. There are no doubt more stocks with similar characteristics - we did not go through the whole universe of European ADRs. Given the depressed state of European markets these days, there are likely many more attractive opportunities for the discerning investor to consider buying.
It won't be too long till Christmas. Maybe it's time to do some early shopping for stock bargains.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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