3 Attractive French ADR Dividend Stocks

U.S. dividend investors should think outside the box in finding undervalued dividend stocks.  Nearly one-third of our Top 100 stocks are located outside the U.S and trade as ADRs, or American Depository Receipts.  Foreign stocks now provide higher dividend yields than their U.S. counterparts, especially in Europe.  Although many of these ADRs have infrequent trading and also tax implications, it is well worth casting your net across the world to find dividend gems.
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Above is the chart of the CAC40 index versus the Dow Jones Industrial Average. As you can see, French stocks have underperformed by a sizable margin, especially since early last year.  In examining French stocks, I ran a screen of those companies that pay a yield that is higher than 2.5 percent and has a market cap above 15 billion;
 Company Market Cap Yield
TOTAL S.A. 118.29B 4.97
Sanofi 107.24B 3.74
BNP Paribas SA 72.67B 4.45
AXA SA 56.25B 5.01
Air Liquide SA 41.55B 2.51
VINCI SA 40.86B 2.69
Danone 39.29B 2.73
Schneider Electric S.E. 37.95B 3.11
Orange S.A. 37.63B 4.45
Société Générale Group 34.784B 4.32
Credit Agricole S.A. 33.85B 5.03
Renault SA 22.86B 3.19
Michelin 20.17B 2.65
Carrefour SA 15.82B 3.56

Owning these stocks through ADRs also enhances risk through currency movements. If the U.S. dollar goes up, the value of your foreign holding goes down.  This has had an impact on many international funds for the last several years, as those that were unhedged against the dollar have substantially underperformed those funds that are hedged. Examine the chart of the WisdomTree International Hedged Quality Dividend Growth Fund versus the WisdomTree International High Dividend Fund.  The hedged product has far outperformed its unhedged counterpart.

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 One item of note for the country and the European Union is French election risk.   The specter of a Le Pen victory has haunted the European stock rally for 2017.  While most polls have Le Pen losing in the May 7th runoff election, investors are worrying of a Trump like upset. This could lead to France’s exit from the single currency, and perhaps the European Union as a whole.

Despite the short-term risks, most investment analysts expect Le Pen to lose and stock valuations to rise as Europe catches up with the U.S. In fact, nearly 70 percent of European fund managers in the Bank of America Merrill Lynch survey foresee positive economic momentum over the next twelve months in Europe.  The odds are high that foreign stocks will outperform the U.S. over the next several years as valuations in Europe are well below that of the home market. According to data from Bloomberg and Factset, firms in Europe’s Stoxx 600 benchmark trade at 14.4 times estimated earnings versus 17.4 for U.S. firms within the S&P 500 stock index. France is even cheaper. The average price/earnings ratio of stocks in the CAC40 stock index is 12.8.  Additionally, there is evidence that when U.S. interest rates rise, the dollar actually weakens.  In fact, non-U.S. developed markets outperform 88 percent of the time when U.S. interest rates are being raised by our Federal Reserve.

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From the above list, I think there are several worthy candidates for a long-term dividend investor looking for overseas exposure.  My first is Société Générale, an ADR that trades under the symbol (SCGLY).  The banking giant is one of the largest in Europe with headquarters in Paris.  The ADR program has been active in the U.S since July 1993. It primarily operates retail banks in France, although it also maintains a large presence in Russia, Africa, Romania, and the Czech Republic. The banks recent earnings were better than expected as net profits came in at 390 million euros ($417 million).   The firm’s capital position also improved. Its tier 1 capital ratio rose to 11.5 percent from 10.9 percent the year before.

Its global banking and investor solution segment posted net profits of 432 million euros in the fourth quarter, up from 286 million euros a year ago.  International retail operations were strong, up over 50 percent to 438 million euros in the quarter. Russia was a solid contributor to growth through its Rosbank operations.  The Russian unit had net profits of 32 million euros in the fourth quarter versus a loss last year.  The bank’s international operations were the highlight of last year. Net income for 2016 in this segment was 1.6 billion euros, up over 40 percent from the 1.1 billion euros from 2015.

Given the strong rebound last year, the French banking giant once again increased its dividend. Its dividend was raised in February to 2.20 euros per share for 2017, which is $2.34 in dollars at today’s currency rates.  ADR shareholders receive 1/5 of this dividend as the structure is 5 ADR shares represent 1 Société Générale home share. This equates to $0.468 per share for U.S. ADR holders.  The dividend exdate is set on May 20. However, U.S. investors are subject to a French withholding tax of 15%, or $.0702 per share.  This reduces the expected dividend, depending on currency translations on the record date, to $.03978.  Given the current price fo the stock at $9.20 a share, the current yield is 4.32%.  This is well above most U.S banks.  The firm really stands out not just on dividend, but valuation.  Société Générale now trades at a mere 10.2 times expected earnings and a mere 0.6 book value.  U.S. banks, on average, are trading at twice this level in price/book terms and close the market multiple of the S&P 500.  I think that this is a great time to add a quality high-yielding European firm like Société Générale to a diversified portfolio.

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Carrefour (CRRFY) is my second selection in the French market. The firm is a consumer company that is actually the world’s second-largest retailer by total revenue. It is the largest retail firm in France and also has top-three market positions in Spain and Brazil. The firm is global, operating in more than 35 countries.  It operates over 13,000 stores worldwide primary in hypermarkets, supermarkets, and convenience stores.  Its operations are weighted heavily in France, with 47 percent of revenue coming from its home country.  The rest of Europe provides 26 percent of revenue while the Americas and Asia account for the balance. It recently launched an online grocery in Italy 2015 where it maintains a smaller presence and purchased Acquires Rue du Commerce and Dia France in the last three years.

Carrefour maintains over 7,700 hypermarkets, 460 express convenience stores, and 790 regular supermarkets.  Revenue at Carrefour rose by 6.2 percent in the firm’s first quarter.   Revenue was 21.3 billion euros in the first three months of the year.  After years of stumbling growth, Carrefour notched its fifth consecutive rise in revenue.  It also guided for near 4 percent revenue growth, in constant currency, for the year.  International sales were very strong, rising by 10.9 percent.  Brazil was a standout both in growth in sales and also currency.  The strengthening in the Brazilian real enhanced revenue growth by about 4 percent.  Sales in Italy rose nearly 2 percent while Spain sales growth was flat.  In its home market, Carrefour maintained sales growth of just below 1 percent.  For the full year, net profit dropped to 746 million euros last year.  But overall, sales were positive ex currency, up  3.3 percent.

As with Société Générale, the firm is trading at a very reasonable valuation of only 11.3 times this year’s earnings.  Due to election concerns and currency, the dividend was the same as last year.  The French firm has a few new positive items for the year.  This includes a new CEO and continued growth in Brazil.  Carrefour CEO Georges Plassat is not set to resign until next year, but has signaled a successor should be appointed soon. Bernardo Sanchez Incera is considered the front-runner at this point as he has been a top banker at the firm since 2014.  Also, a potential swap of stores with WalMart could enhance growth prospects.  Brazil is a big focus of the firm. Last year, the French retailer invested over 500 million euros in Brazil and Argentina.  Brazil has slowly become the second largest country behind France.   It generates 16 percent of its global revenue from the region.  Its express store business is accelerating in Brazil. It recently opened its 70th Carrefour Express store in Brazil. Five of these express stores were opened this year alone.  It now has over 100 hypermarkets and 40 supermarkets.

With the just released solid sales growth numbers and ongoing expansion in Brazil, investors should be less worried about slower growth for 2017.  Carrefour shares are down 8 percent year to date versus a gain for the CAC 40 index.  Carrefour declared a dividend of 0.70 euros per share, or 0.74 in dollar terms this year.  The dividend exdate is set on May 23. It also has a 5/1 ratio for shares of the ADR. Trading at $4.52 in the U.S. market, it offers a payment of $0.14 based on today’s currency rate.  This puts the yield at 3.09 percent.  Investors though will also pay the fifteen percent tax.  Although the yield is not as stellar as  Société Générale, I feel the stock has more potential for capital appreciation given the fact that the ADR has fallen in half from the $8 a share it traded for three years ago.

 

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“After two years of being defensive, we are offensive now,” Total’s Chief Executive Patrick Pouyanne

My last and favorite of the trio is Total SA. the large French oil company.  It is also a member of our Top 100 dividend stock list.  Total is a global energy giant that explores and refines oil.  Reserves stand at about 12 billion barrels of oil equivalent.  The company is truly global, much like competitors Exxon and Royal Dutch Shell. It operates in over 60 countries worldwide.  The firm also has a stake in Novatek, a Russian oil company.  The firm is also a large player in chemicals through TotalFinaElf subdivision known as Atofina. What I like about the firm outside its large dividend is its capital spending should dramatically decrease over the next few years, while production grows. This will allow for an acceleration of free cash flow, which will further protect the dividend.

 

Most analysts project production growth of between 4-5 percent over the next five years. This is among the top range of the oil majors.  Total SA has over 10 major projects in the works. In the past three years, Total SA has been one of the most aggressive firms at project initiations. This includes start-ups at Incahuasi in Bolivia, Kashaghan in Kazakhstan, Vega Pleyade in Argentina, ICHTHYS in Australia, and Termokarstovoye in Russia.  The firm is has also signed a Heads of Agreement (HoA) with the National Iranian Oil Company (NIOC) for the development of phase 11 of South Pars. South Pars is one of the world’s largest gas field. Total SA will control the SP11 project with a 50.1 percent interest. Total also started production at the Moho Nord site off the coast of the Republic of Congo.  TOT maintains a 53 percent stake at Moho Nord.  The firm is also diversified into solar with its 65 percent stake in U.S. solar maker Sunpower (SPWR).  For downstream growth, Total SA announced it signed a 50/50 joint venture with Borealis and Nova to for a new ethane steam cracker and polyethylene plant on the U.S. gulf coast.

Total SA offers an attractive dividend yield of 5.1%, which is above the peer average. The company also maintains a solid balance sheet.  Long term debt stands at just over $44 billion.  Cash on hand is just under $25 billion. As with our other two recommended French companies, Total recently also delivered strong fourth quarter 2016 results.   Total’s cost control was evident in its Q4 results. The company had a net profit of $548 million in Q4.  This was a big change from the net loss of $1.63 billion in the same period for 2015.  Revenues grew by a stellar 12 percent to $42.2 billion. Total’s (TOT) overall operating earnings for 2016 advanced to $2.7 billion from $2.4 billion. Total’s refining and chemical operation income rose 13 percent to over $1 billion in Q4. Upstream earnings were strong due to higher crude oil prices and a reduction in costs. Assisting earnings were higher oil prices. Average brent crude prices for Q4 were at $49 per barrel, up $4 from last year.

Total SA indicated that its new efforts to lower costs are paying off.  The firm expects that free cash flow breakeven should drop from $55 barrel to $50 barrel in the next year. This can be achieved by increasing its refining margins to $35 along with additional cost savings of a half a billion dollars. Total’s new capital expenditure budget of  $16-17 billion also will be a large portion of the firm’s savings.  This is one of the largest reductions of the oil majors. Consider that the capital budget was just over $18 billion in 2016 and was as high as $30 billion back in 2014. Production growth should prove to be a major driver of cash flow growth during the next five years with Total anticipating averaging volume of growth of about 4% per year through 2020, greatest among its peers.

Overall, Total SA stands out as a superior oil major. It offers a high dividend of just over 5 percent along with a strong growth profile and lower capital spending. Total’s full-year dividend will be 2.45 euros ($2.60) a share. This was a euro cent better than a year ago, a rare feat in the energy sector. The dividend exdate is set on May 30. Total SA shares trade at a 1 to 1 relationship with its foreign shares.  It also offers several options for U.S. shareholders in regard to withholding.  With full taxation at 15 percent, the yield comes in at 4.37 percent. It maintains one of the lowest betas within the group as well along with Exxon, at 0.9  Priced at $50.53 a share, it trades at a mere 11 times 2017 projected earnings.  Of the European oil majors, it offers the safest dividend alongside a strong growth profile.

 

 

 

Note;  Taxes paid to both France and the U.S. can obviously be a big problem for ADR investors.  In avoiding the double taxation, any dividend ADR investor should claim a foreign-tax credit on their federal tax return.  But this only applies on those ADRs held in a taxable account.  There is no credit for withholdings in IRA’s or any tax deferred account.  Overall, it is better to hold these stocks in a taxable account and then claim the credit.

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