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Friday, May 31, 2013 - 11:30

These High-Yield Funds Make A Great Investment Even Better

Friday, May 31, 2013 - 11:30am

As Europe emerges from recession, investors are flocking to the region's stocks 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 total investment last year 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 European Central Bank lowered its main rate to a record low. A weak 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 European blue chips and improve their portfolio safety and yields by owning shares of multinational companies. Many large European Union (EU) companies sell their wares all over the world and have brands familiar to consumers in dozens of countries. As with U.S. multinationals, global sales mean that these firms aren't dependent on growth in their home market for earnings.

In addition, some European multinationals are cashing in on booming emerging markets. This year, one-fifth of the companies in the Bloomberg European 500 Index (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)
Yield: 3%
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 increased revenue per available room by more than 5%, which led to a 4% gain in revenues, to $1.84 billion. Aggressive efforts to reduce costs and leverage the company's industry-leading scale pushed profits 15% higher, to $545 million, and earnings 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 its dividend 16% to an annualized rate of 86 cents a share. Analysts expect another 10% dividend hike from the company this year.

Bayer (OTC: BAYRY)
Yield: 2.4%
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. This acquisition 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 core EPS improved 10% to $6.81. The main growth catalyst was launches of new prescription drugs such as Xarelto, a blood thinner on track to generate $800 million in sales this year.

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 industry.

Unilever (NYSE: UN)
Yield: 3.3%
If you crave Popsicles, Klondike Bars or Good Humor ice cream, Anglo-Dutch consumer conglomerate 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 worldwide.

Unilever's sales improved 11% last year to $65.9 billion on the strength of double-digit gains in emerging markets, which currently represent over 55% of annual sales. Core EPS rose 11% to $2.02 and reflected profit gains across all of Unilever's business groups.

An impressive 40% improvement in free cash flow to $5.5 billion resulted from better management of working 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 present currency risk for U.S. investors and also result in foreign withholding 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.

P.S. -- Stocks like Unilever and Bayer are perfect for what we call a "Dividend Trifecta" strategy. Simply put, it's a three-part approach to dividends that multiplies the effectiveness of every dollar you invest. The plan is specifically engineered for people who want to retire sooner or for those who would like to get a steady stream of extra income now. Go here to learn more.

Lisa Springer does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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