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Own These 3 Blue-Chip European Bargains Before It's Too Late
As Europe emerges fromrecession , investors are flocking to the region'sstocks to take advantage of current low valuations.
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 since 2007.
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 U.S. dollar.
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 share ( EPS ) 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.
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.