Tag Archives: european

Top weights ‘best-in-class’ European based global companies. Has traded in a very steady range with steady distributions for over six years. The fund maintains a cyclically sensitive bias, with its heavy weighting on the financial sector. It’s beginning to look as though the “New Normal” will indeed be a new normal for some time to come. With few exceptions, most of the global economy has lost a lot of growth momentum after many years of what seemed like limitless expansion. The most recent Organization for Economic Co-operation and Development (OECD) ‘ Global Economic Outlook ‘ reported that “… A further sharp downturn in emerging market economies and world trade has weakened global growth to around 2.9% this year – well below the long-run average – and is a source of uncertainty for near-term prospects… ” The traditional response to an economic slowdown has always been to increase the amount of cash in the banking system and at the same time lower benchmark interest rates. This in turn lowers consumer and business interest rates. The basic principle behind ‘Quantitative Easing’ is that consumers and businesses would be more inclined to borrow for durable goods, inventory, home buying or home construction and so on, thus creating demand which leads to more hiring. As one might expect, there’s a downside to “QE”. Lowering government benchmark interest rates works its way up the government bond market ladder. So, for example, pension funds will receive lower interest rates when they purchase government bonds which in turn affect their actuarial projections to meet pension payout expectations. Also, when short term savings rates decline, consumers will be less inclined to purchase short term certificates of deposits, hence reducing demand for a popular bank product. Last, but by no means least, is that individual investors will receive smaller distributions from their portfolio’s cornerstone government bond funds. A confluence of events stemming from the credit market collapse in 2008, in addition to the recent economic contraction in the Asia-Pacific region has made most QE programs virtually ineffective. The point of the matter is that the individual investor’s cornerstone fixed income may be safe, but may not contribute meaningfully to the overall portfolio for many years to come. One way to replace the loss of distributions in government bond funds without incurring exceptional risk, is through diversifying among high-quality equity, dividend focused funds. One suggestion would be the First Trust Dow Jones STOXX European Select Dividend 30 Index ETF (NYSEARCA: FDD ) . The underlying index is the STOXX® Europe Select Dividend 30 Index (Zurich: SD3P) which is designed to … track high-dividend-yielding companies, across 18 European countries: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom… The fund provides relatively good return by any standard: a trailing twelve month yield of 4.45% and an SEC yield of 5.02%. The STOXX index itself has a yield of 5.57%. There is a 0.60% net expense ratio which is much higher than the industry average 0.44%. (click to enlarge) The fund was incepted in August of 2007 closing its first day of trading at $30.75. It had declined considerably since then, tracking the STOXX index down over the years closing November 13, 2015 at $12.42. The Price-Dividend History Chart demonstrates that the fund peaked in October of 2007 at $32.26 per share and declined as housing and credit bubbles deflated, dragging global markets down with them. The fund reached its all-time low of $7.75 a share in March of 2009. It recovered by mid-2009 and has since traded in a steady range from $10.86 to $16.04. The pertinent questions investors should ask is, first, whether the fund is able to continue to produce the steady 4.45% distribution and, second, are the returns worth the risk. The best way to answer these questions is to step through the fund’s holdings sector by sector. First, it’s a good idea to understand the fund’s geographical distribution and then its sector allocation. As the pie chart below demonstrates, the fund is heavily weighted in Europe’s top performing economies, in particular, the United Kingdom, Switzerland France and Germany. Data from First Trust Knowing the geographic allocation, it’s now a good idea to chart-out the fund’s sector distributions. Data from First Trust Clearly, the fund is heavily weighted in Financials. Generally, the financial sector is cyclical, that is, it rises and falls with the economy. On the other hand, the second heaviest weight is in Utilities, a non-cyclical sector; it continues to perform regardless of the economy. Similarly Heath Care is non-cyclical, as well as Consumer Staples. Telecom is considered sensitive to the business cycle; however, mobile communications create efficiencies and productivity so Telecom services might not be as sensitive to the business cycle. Similarly, both the Energy and Industrial Sectors are sensitive to the economy, but not nearly as much as Consumer Discretionary or Materials. It seems that overall, the fund is weighted a bit more towards sectors which rise and fall with the economic tide. As to the degree of sensitivity, that would depend on the individual holdings as discussed below. The financial sector includes Europe’s premier banks, insurance and real estate investment. All of these companies are European multinationals and the top weighted funds of this sector have global reach. Three of the 14 holding have payout ratio in excess of 100% of adjusted earning, and those for which no information was available, a percentage of operating cash flow has been substituted. The average yield of the sector is 4.425%. Excluding extreme or absent values, the rough payout ratio average is 70.5%, high but sustainable. Financials 44.92% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Amlin PLC OTCPK:APLCY 4.14% 5.76% 90.62% 14.37 17.68 6.19% Enterprise insurance and reinsurance Swiss Re OTCPK:SSREY 7.70% 4.28% 71.57% 9.06 33.10 35.92% Reinsurance, property and Casualty Provident Financial OTCPK:FPLPY 2.91% 4.08% 76.59% 26.43 257.46 9.07% Financial services, personal credit and other consumer lending Zurich Insurance OTCQX:ZFSVF 6.46% 3.98% 517% of cash flow 10.30 35.00 4.71% General insurance, consumer and commercial insurance Swiss Prime Site OTC:SWPRF 4.82% 3.31% 89.65% of cash flow 15.05 82.14 1.38% REIT: office and retail Standard Charter OTCPK:SCBFF 1.52% 3.12% 106.85% 14.06 190.27 6.22% International banking, Islamic banking, private and retail services SCOR OTCPK:SCRYY 3.99% 3.09% 26.51% of cash flow 11.39 43.95 6.96% Reinsurance, life, property and casualty, aviation, marine Allianz OTCQX:AZSEY 4.35% 3.02% 46.96% 10.83 53.82 10.81% Holding company for Allianz, insurance and asset management PSP Swiss Property OTC:PSPSY 3.81% 2.64% 88.91% 23.34 47.77 NA Holding company for real estate investment and management Banco Santander SAN 4.68% 2.58% 117.65% 9.19 240.76 0.80% Retail and Private banking; Asset management and insurance Muenchener Rueckversicherung OTCPK:MURGY 4.32% 2.49% 39.18% 9.11 15.73 6.15% Holding company; business and reinsurance, health and asset mgnt Skandinaviska Enskilda Banken OTCPK:SKVKY 5.18% 2.28% 49.68% 11.44 561.00 36.56% Sweden merchant bank; retail, corporate and institutional banking Unibail-Rodamco OTCPK:UNRDY 3.89% 2.26% 42.66% 12.25 87.70 NA French: commercial real estate investment; European shopping centers Baloise Holding OTCPK:BLHEY 4.18% 1.94% NA 9.54 33.03 2.13% Insurance, banking, retirement services Data from Reuters and Yahoo! Finance The Utility sector accounts for four holdings with an average yield of 6.09%. However, the payout ratios indicate that a few of these companies are distributing dividends nearly equal to or in excess of adjusted earnings. Hence it a strange twist, it seems that the financial sector’ dividend distributions are more stable than the utilities. Utilities 14.36% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business SSE Plc OTCPK:SSEZY 5.92% 4.95% 161.35% 27.09 100.33 4.78% UK mainly electric utility; natural gas distribution and storage Snam SpA OTCPK:SNMRF 5.15% 3.82% 19.10% of operating cash flow 13.75 190.00 4.56% Italian natural gas distribution, treatment, management; owns distribution infrastructure United Utilities OTCPK:UUGRY 3.94% 3.62 94.76 24.12 249.98 1.91% UK water and sewage management Fortum OTCPK:FOJCY 9.35% 2.19% 53.88% of operating cash flow 2.60 44.15 5.39% Finland based delivering electricity and heat and related services. Data from Reuters and Yahoo! Finance The Healthcare sector is solid with two world class, well established pharmaceutical companies: Glaxo-Smith-Kline (NYSE: GSK ) and AstraZeneca (NYSE: AZN ) . The holding BB Biotech (OTC: OTC:BBAGF ) is listed by the fund as a ‘materials company’. However, after double checking with several sources, including the company’s home page, it best described as an investment company specializing in Biotech companies. Since the return is a function of the Heath Care sector it seems logical to include this company with the Health Care sector. Health Care 7.36% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business GlaxoSmithKline GSK 5.82% 4.02% 39.40% 6.85 304.36 5.57% R&D pharma, vaccines, consumer health care. A premier global pharmaceutical company; 84 production facilities in 36 countries AstraZeneca AZN 4.36% 3.33% 141.51 47.89 63.10 4.01% R&D biopharmaceuticals for cardio-vascular, oncology, autoimmunity and more. Premier global in over 100 countries BB Biotech BBAGF 4.02% 2.96 15.84 3.75 0.00 125.74 (Labeled as Materials) Investment Company specializing in Biotech seeking researching Alzheimer’s, HIV, Hepatitis C, hypertension, hematology, diabetes and cancers Data from Reuters and Yahoo! Finance Telecommunication Service seems ‘ordinary’; however one holding, Orange (NYSE: ORAN ) qualifies as an NYSE-ARCA listing. Telecoms often have high payout ratios and that seems to be the case here. Telecom Services 7.23% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Proximus OTC:BGAOF 3.64% 2.78% 7.973% of operating cash flow 22.54 68.78 -11.57% Belgium landline and mobile, telephony, internet and television Orange ORAN 3.82% 2.32% 110.24 46.42 114.76 -11.53% French serves France, Spain, Poland, Africa and Middle East Swisscom SCMWY 4.31% 2.08% 298% of operating cash flow 15.45 185.67 1.92% Switzerland and Italy: enterprise and residential, broadband, television, data, mobile and landline Data from Reuters and Yahoo! Finance The energy holdings are Royal Dutch Shell (NYSE: RDS.A ) and Total (NYSE: TOT ) . Again, both are leaders in every area of energy and with a far reaching global presence. Energy 7.17% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Royal Dutch Shell RDS.A 7.24% 4.01% 187.27% 107.49 31.26 2.28% Well-to-Distilled Product-to-End Product global Oil and Gas energy company operating in over 70 countries Total TOT 5.63% 3.13% 195.03% 33.42 44.59 0.42% Well-to-Distilled Product-to-End Product global Oil and Gas company operating in over 50 countries Data from Reuters and Yahoo! Finance BAE Systems (OTC: OTCPK:BAESY ) is a well-respected aerospace-defense company often involved in state-or-the-art defense projects, joint U.S. defense projects and is considered as the premier weapons developer of the U.K. Carillion (OTC: OTC:CIOIY ) seems to operate a unique niche as a global support and service provider for ‘public-private-projects’ construction in aviation, commercial, rail, roads, utilities, and other areas as well. Industrials 6.66% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Carillion CIOIY 5.73% 3.79% 64.23% 12.42 65.38 3.98% Support Services for public-private partnerships, construction in the U.K., Middle East and North Africa BAE Systems BAESY 4.69% 2.73% 93.44% 19.93 156.72 5.08% Aerospace, cyber security, electronics, and defense with divisions in the U.S. and U.K. Data from Reuters and Yahoo! Finance The last table contains combined, the one consumer staple and the one consumer discretionary companies. Consumer Staples and Discretionary Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business J Sainsbury OTCQX:JSAIY 4.83% 5.75% 47.5% of operating cash flow NA 49.94 -1.45% UK Consumer Staples: supermarkets and convenience stores, online grocery and general retail good. Also in joint ventures for banking and insurance UBM OTCQX:UBMPY 4.16% 3.52% 76.36 20.42 80.43 -2.52 UK Consumer Discretionary: B2B media and marketing, communications, tradeshows, live events Data from Reuters and Yahoo! Finance All in all, a common thread seems to be that whatever European ‘best-in-class’ companies qualify under the fund’s objective, then they are included in the fund. First Trust lists the fund’s P/E as 13.27, price to book at 1.44, to cash flow, 10.33 and to sales, 0.84. The average 30 day trading volume is 80,874 so it shouldn’t present too much of a challenge to acquire a position. Overall, the fund seems to be well grounded with those premier holdings; however, it does stretch out a bit on the risk curve with others. The argument may be made that European banks have survived the worst of all possible situations and that, although it may take more time they will regain strength. If so, the fund is like to experience share price gains. There’s only one caveat: ECB President Mario Draghi has indicated that the European Central Bank might further weaken the Euro to stimulate growth. This might be balanced out by the strong Great British Pound Sterling and the Strong Swiss Franc. Also, the U.S. Federal Reserve Bank has also indicated that it might increase, slightly, its benchmark rate, hence creating a stronger dollar. This all might affect the fund’s yield by currency translation but, again, that greatly depends on the size of the Fed rate hike. All in all, the fund might not replace the safety of a government bond fund, but risk-wise, it seems to be on par with muni funds and then with a better yield.