As Europe emerges fromrecession , investors are flocking to
the region'sstocks to take advantage of current low
Since July, when European bankers pledged to prevent a
eurozone collapse,funds flowing into European stocks have risen
by $5.5 billion, which is nearly equal to the totalinvestment
lastyear and the first year of big inflows into European stocks
Part of the appeal is the possibility of further interest-rate
cuts. This month, the EuropeanCentral Bank lowered its main rate
to a record low. Aweak currency also helps European exports. In
the past five years, the euro has depreciated 20% against the
The main appeal, however, is the bargain prices on some
blue-chip European stocks, which currently trade at average
price-to-earnings (P/E ) ratio of 12.5 and well below the
S&P's P/E of 19.
Income investors can take advantage of underpriced
Europeanblue chips and improve their portfolio safety and yields
by owningshares of multinational companies. Many large European
) companies sell their wares all over the world and have brands
familiar to consumers in dozens of countries. As with U.S.
multinationals, globalsales mean that these firms aren'tdependent
on growth in their homemarket forearnings .
In addition, some European multinationals are cashing in on
boomingemerging markets . This year, one-fifth of the companies
in the Bloomberg European 500Index (BE500)will generate less than
half of their sales from Western Europe.
With that in mind, here are three European blue-chip stocks
that benefit from iconic brands, global sales, and rising
earnings and dividends.
|Intercontinental Hotel Group (NYSE:IHG )
If you are like most Americans, chances are good that
you've stayed at a Holiday Inn. Most people don't know that
this popular chain is actually owned by a U.K.-based
hotelier, Intercontinental Hotels Group.
Intercontinental owns more hotel rooms than any other
hotel company - more than 674,000 guest rooms and 4,600
hotels located in nearly 100 countries. Intercontinental
also has more than 1,000 new hotels in its development
pipeline, representing more than 12% of all hotel projects
worldwide. More than half of the company's new hotels are
located in developing markets such as China, Eastern Europe
and South America, where demand is growing fastest.
Last year, Intercontinental increasedrevenue per
available room by more than 5%, which led to a 4%gain
inrevenues , to $1.84 billion. Aggressive efforts to reduce
costs andleverage the company's industry-leading scale
pushed profits 15% higher, to $545 million, andearnings per
) 11% higher, to $1.86.
Analysts forecast 9% annual earnings growth for
Intercontinental during the next five years.
Intercontinental shares trade at a P/E of 15, a 10%
discount to the hotel sector's P/E of 17.
Intercontinental achieved an industry-leading 17.5%
return on assets last year and signaled its confidence in
the future by raising itsdividend 16% to an annualized rate
of 86 cents a share. Analysts expect another 10% dividend
hike from the company this year.
|Bayer (OTC:BAYRY )
Have you ever taken an Alka-Seltzer or a One A Day
multivitamin? These health products are household names in
the United States -- but they're owned by German
pharmaceutical company Bayer.
Bayer is one of the world's top producers of
over-the-counter medicines, crop-protection chemicals and
polyurethane. The company is expanding its health care
business through acquisitions and recently spent $1 billion
to acquire U.S. medical-device maker Conceptus.
Conceptus markets Essure, the world's leading long-term
birth control device. Thisacquisition has made Bayer a
leader in the birth control market,offering a complete
range of short-term, long-term and permanent contraceptive
choices for women.
Sales in 2012 were the highest in the company's 150-year
history. Bayer's revenues rose 9% to $51 billion, and
coreEPS improved 10% to $6.81. The main growthcatalyst was
launches of new prescription drugs such as Xarelto, a blood
thinner on track to generate $800 million in sales this
Consensus analyst estimates look for 10% earnings growth
from Bayer in 2013. The company plans to raise its dividend
15% to a $2.51 annual rate, which is consistent with
Bayer's policy of paying out at least 30% of its earnings.
Bayer appears bargain-priced at a 27 P/E, which is below
the 33 average P/E of its peers in the pharmaceutical
|Unilever (NYSE:UN )
If you crave Popsicles, Klondike Bars or Good Humor ice
cream, Anglo-Dutch consumerconglomerate Unilever may be the
investment for you.
In addition to these popular brands, Unilever's
portfolio contains hundreds of other food, housecleaning
and personal-care items. It owns 14 brands that each
generates more than $1 billion in annual sales. The
company's products are used daily by more than 2 billion
people and are present in 7 of every 10 homes
Unilever's sales improved 11% last year to $65.9 billion
on the strength of double-digitgains in emerging markets,
which currently represent over 55% of annual sales. Core
EPS rose 11% to $2.02 and reflectedprofit gains across all
of Unilever's business groups.
An impressive 40% improvement infree cash flow to $5.5
billion resulted from better management ofworking capital
and sets the stage for more aggressive dividend growth.
After hiking its payout by an average rate of 8% for more
than 30 years, Unilever announced an 11% dividend hike last
quarter to a $1.40 annualized rate. Analysts forecast
long-term earnings growth of 8%. Unilever shares trade at a
P/E of 21, in line with packaged-food industry peers.
Risks to Consider:
Intercontinental paid out 126% of earnings in dividends last
year. This high dividend payout can't be sustained without
further EPS growth. In addition, unlike the other two companies
discussed here, Intercontinental doesn't report quarterly
financial results, so investors have less visibility into sales
and earnings trends. All three companies pay dividends in euros,
which may presentcurrency risk for U.S. investors and also result
in foreignwithholding taxes on dividends.
Action to Take -->
My top pick overall for long-term investors is Unilever due to
its broad portfolio and the recession-resistant nature of the
consumer products business. However, all three of these picks
have industry-leading market shares, modest valuations and
above-average dividend growth and yields.
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