Tag Archives: european

The WisdomTree Europe Dividend Growth ETF: Timing Is Everything

The fund is heavily weighted with best in class European companies. The fund is dividend weighted with a defensive bias. The poor performance seems to be a result of coming to market at the wrong time. Europe seems to have a split personality, at times somewhat fractious and recalcitrant and at other times cooperative and harmonious. The moribund Medieval Period was followed by a lively Renaissance. Centuries of religious wars were followed by an enlightened scientific revolution. In the 20th century, Europe engaged in decades of warfare not witnessed in all of human history. In the wake of that 20th century dark age, Europe determinedly embarked towards a second enlightenment. The basis for this hopeful new age is founded on equality, solidarity and prosperity, achieved through a unified economy. Europe has created an equitable, cooperative capitalism: carefully regulated and open. This new age has led to the creation of a sizable economy of well founded, well established global companies. An opportunity to participate in the potential growth of these companies may be had through the WisdomTree Europe Dividend Growth ETF (NYSEARCA: EUDG ). According to WisdomTree : … WisdomTree Europe Quality Dividend Growth Fund seeks to track the investment results of dividend-paying companies with growth characteristics in the European equity market … The tracking index is WisdomTree’s own proprietary index [DEFA]: … The Index is comprised of 300 companies from the eligible universe based on their combined ranking of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid. .. It seems that WisdomTree’s approach to dividend weighting results in a more conservative passive methodology than weighting by market price. An interesting description written by Mr. Jeremy D. Schwartz, titled “Dividends of a Dividend Approach ” , details the reasoning of the approach and the results. For example, it specifically takes into account, the importance of dividends in determining a stock’s price; the fact that dividends historically have provided the majority of the stock markets real return; dividends are an objective measure; dividends reflect management’s shareholder interest and lastly, the demand for income among baby boomers in retirement. The fund itself is a relative newcomer to the industry, incepted in May of 2014. If the fund is weighted by dividends and the quality of earnings, the top weightings should give a good indication of the risk to the investor. (click to enlarge) First it should be noted that the fund has about 200 holdings as of mid-October, however, just over 50% of the funds weighting is concentrated in its top holdings. There is something to point out in those top holdings. There seems to be a repetition of companies held. For example Roche Holdings ADRs on the OTC are assigned the symbol OTCQX:RHHBY . On the “Swiss-6” exchange, it’s ROG.VTX and on another Swiss exchange it’s Ro.SW. They all represent the same company and the same class of stock, hence Roche Holdings has a combined 8.31% weighting in the fund’s holdings. Similarly, Unilever is listed as UL on the NYSE, on the London exchange UNA, on the Amsterdam exchange as UNC as well as others. The point being that in the fund’s top holdings, Unilever holds a combined 3.98877% weighting and Roche 8.31% in the top fund’s holdings. By combining those ,means that the top 50% is really contained in the top 19 holdings, i.e., 9.5% of the fund. The top 50% of the fund is more heavily weighted in Consumer Staples, Health Care and Telecom Service than the entire fund. On the other hand, the top 50% is ‘lighter’ in Consumer Discretionary, Industrials, IT. Lastly the top half contains neither a Financial nor Material Sector allocation. It then appears that the more defensive sectors comprise the heaviest dividend weights. The more cyclical sectors are less weighted and more widely distributed among the fund’s 200 holdings. Below is a summary table of the top 50%, containing 19 companies with a relevant few metrics. Company Fund Weighting Yield Cash Flow Multiple Payout Ratio ROI/ROE Price/Earnings Price/Book Sector Roche [RHHBY] 8.31031% 3.06% 18.10 73.94% 20.07/48.00 23.37 10.96 Health Care British American Tobacco ( OTCPK:BTAFF ) 4.19366% 3.98% 14.71 46.50% 22.57/70.15 17.50 11.74 Consumer Non-Cyclical Anheuser-Busch (NYSE: BUD ) 4.02124% 3.11% 26.58 29.15% 10.25/19.29 19.38 3.77 Consumer Non-Cyclical Unilever [UL] 3.98877% 3.14% 17.37 41.40% 17.63/33.21 22.16 7.00 Consumer Non-Cyclical Novo Nordisk (NYSE: NVO ) 3.16913% 1.39% 21.09 41.30% 75.61/82.48 29.94 23.78 Health Care Bayer ( OTCPK:BAYRY ) 3.09927% 1.95% 14.14 53.35% 7.40/16.71 26.38 4.13 Health Care SAP (NYSE: SAP ) 2.35035% 1.79% 17.35 42.76% 11.82/16.66 23.46 3.47 IT Daimler ( OTCPK:DDAIF ) 2.32166% 3.41% 5.63 32.51% 6.82/17.81 9.62 1.98 Consumer Cyclical Diageo (NYSE: DEO ) 2.18663% 2.99% 15.88 59.43% 13.56/32.63 19.30 5.91 Consumer Non-Cyclical Telefonktiebolasget Ercsso [ERIC] 1.95709% 3.72% 13.59 109.29% 5.73/7.55 27.43 2.07 Telecom Service Inditex ( OTCPK:IDEXY ) 1.79386% 1.67% 26.14 29.56% 26.31/29.39 35.37 9.78 Consumer Cyclical Louis Vuitton ( OTCPK:LVMUY ) 1.73739% 1.92% 15.88 46.08% 9.29/12.71 24.76 3.02 Consumer Cyclical Hennes & Mauritz ( OTCPK:HNNMY ) 1.6948% 3.14% 16.43 *51.54% 41.57/44.71 23.82 9.98 Consumer Cyclical L’Oreal ( OTCPK:LRLCY ) 1.6825% 1.65% 23.28 *37.86% 11.80/12.90 31.27 3.99 Consumer Non-Cyclical Reckitt Benckiser ( OTCPK:RBGLY ) 1.66167% 2.14% 24.96 59.49% 16.66/24.90 28.23 6.90 Consumer Non-Cyclical ABB LTD (NYSE: ABB ) 1.62665% 3.12% 11.23 72.54% 9.54/15.73 16.94 2.90 Industrials Schneider Electric ( OTCPK:SBGSY ) 1.44748% 3.61% 11.19 *40.34% 6.20/9.03 17.64 1.50 Industrials Airbus Group ( OTCPK:EADSY ) 1.4196% 2.08% 9.04 *18.83% 5.61/32.83 16.54 7.94 Industrials Syngenta (NYSE: SYT ) 1.41046% 3.57% 14.77 *52.75% 10.39/15.68 20.92 3.42 Industrials Totals/Averages 50.07% 2.707368% 16.731 49.40% *estimated % of cash flow per share 17.30/28.55 22.84 22.84 The returns are anything but stellar, however, there’s an important reason for this. Returns 1 Month 3 Months 1 Year Since 5/7/2014 Inception WTEDG Index -2.87% -6.18% -6.28 -8.76 EUDG Fund -2.49% -6.56 -5.96 -9.21 The fund is not currency hedged. A comparison with the Euro vs the U.S. Dollar tells the story. (click to enlarge) The fund came to market precisely on the same day the Euro peaked in this time interval at $1.37 per Euro. From there it steadily trended lower to its current $1.12; just over an 18% decline. The fund closed its first day of trading at about $25.25. An 18.25% decline of the shares from that point works out to $20.64, just above its September 29 low of $20.05. Hence, when translated back to USD dollars, the value of the fund ‘shrank’ even though the top line companies continued to perform well. The currency translation is a very important point for the investor to keep in mind. When the European currencies weaken vs the U.S. Dollar, the NAV will decline, even if the companies in the fund are doing well . Hence, purchasing when the U.S. Dollar is strong is like purchasing the fund at a discount. Eventually, Europe will regain its economic footing and European currencies will appreciate against the U.S. Dollar, hence the potential for capital appreciation on a ‘dollar cost averaged’ investment. The same is true of European denominated dividends and distributions. The whole point of the matter is that for investors with risk capital, and the willingness to be patient while gradually accumulating a position knowing that the top 50% of the fund has an average yield of over 2.7% and the fund is defensively allocated, then it’s reasonable to assume that over a longer time horizon the future returns will outweigh current risk. The current poor returns are a matter of having a good idea, but extraordinarily bad timing.

Taking Stock Of International ETFs After The Sell Off

Summary Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. Despite the best efforts of the European Central Bank to stimulate economic growth through quantitative easing programs, both developed and emerging markets overseas have seen momentum vanish in 2015. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. In Europe, the fiscally conservative German stock market was rocked by the Volkswagen scandal alongside other financial worries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. The iShares MSCI EAFE ETF (NYSEARCA: EFA ) is the largest international exchange-traded fund with over $56 billion in total assets. EFA tracks 900 stocks in both developed and emerging foreign markets. In its market cap weighted form, the top country allocations are Japan, United Kingdom, and France. Since hitting a high in May, EFA has fallen more over 18% to the September low – just barely avoiding a drop into bear market territory . This route was initially started by weakness in emerging markets, but has seen Europe join in to drive prices lower in recent months. Like nearly all risk assets, the October rally has led to some relief of the selling pressure in EFA and barely pushed the index back into the black for the year. Another key item of note in international markets is the price action of the U.S. dollar, which sent so much money spinning into currency-hedged ETFs at the beginning of the year. The P owerShares DB USD Bull ETF (NYSEARCA: UUP ) has been decidedly flat over the last five months. Recent price action may even suggest a mild downside bias, which could lead to a test of support at $24.50 in the near future. ETFs such as the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) benefited from the rise of the dollar as the built-in currency arbitrage worked as a tailwind in the first half of the year. Now there is less of a convincing case that the U.S. dollar will continue its rally and lend weight behind the currency hedged theme. A falling dollar would ultimately make a traditional international fund such as the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) a more attractive near-term opportunity. Of course, this is predicated on the expectation that the October rally in global stocks has further room to run through the end of the year. I would sum up the state of international markets in the following bullet points: From a pure price perspective, broad-based international ETFs were leaders on the upside and consequently leaders on the downside relative to U.S. markets this year. That makes them a more aggressive play for those that are positioned for a rebound. While it appears that there are sound fundamental and technical reasons to avoid international stocks, they still offer compelling upside opportunity in the context of a well-diversified portfolio. Your allocation to this sector will likely be governed by your overarching risk tolerance. For core international exposure , I believe that it’s important to stick with broad-based indexes rather than trying to hand pick specific countries or sub-regions. The risk of hits and misses in concentrated areas make for a less compelling investment proposition. International investors should also keep one eye on the currency trends as well. Even if your fortunes aren’t tied to a currency-hedged ETF, there are still important correlations that can be gleaned from observing forex markets. Remember that a higher dollar (lower euro) favors currency-hedged positions, while a lower dollar favors traditional un-hedged exposure. The Bottom Line Growth-oriented investors can still benefit from a strong comeback in international stocks given the backdrop of global stabilization. However, it is imperative to have a counterintuitive mindset that allows you to identify opportunity on the way down and curb your enthusiasm in the late stages of a rally. Be mindful of the inherent volatility in international ETFs versus the major U.S. indexes as well.

COPEL Is Much More Stable Than CEMIG, But The Potential Upside Is Also Lower

Summary COPEL’s business is sound, with slow growth, low debt, a good dividend, good fundamentals and a good, stable historical performance. Due to the situation in Brazil, there is still more downside potential for the stock. CEMIG is a much more risky play, but the upside is also much higher. Introduction I recently wrote an article where I analyzed investment opportunities in Brazil that are listed on the NYSE and gave an overview of the economic situation. I found four interesting companies, of which BrasilAgro (NYSE: LND ) and Brasil Foods S.A. (NYSE: BRFS ) are good, but their P/E ratio is too high. This leaves us with two electrical companies, CEMIG (NYSE: CIG ) and Companhia Paranaense de Energia – COPEL (NYSE: ELP ). I have already written about CEMIG here and here , so in this article, I will analyze COPEL. About ELP ELP is the largest company of the State of Paraná (South Brazil), and serves electricity to 4,370,200 units. The company uses 18 hydroelectric plants that give 99.5% of its own electrical production, 1 thermal plant and 1 wind plant, with total installed capacity of 4,754 MW, a transmission system with 2,302 km of lines and 33 substations, a distribution system which consists of 192,116 km of lines and network of up to 230KV, and an optical telecommunication system. The company was founded in 1954, and has been listed on the NYSE since 1997. The State of Paraná is the major shareholder, with 58% of voting shares. There has been a lot of regulatory turbulence in the energy sector lately, especially with CIG losing 45% of its electricity generation capacity due to lost concessions. Energy prices increased and are currently under the red flag 3 regime, meaning that the electrical utilities sector is under pressure. The result of this is that ELP’s revenues increased 32% in Q2 2015, mostly due to price increases. Operating expenses increased even more, around 38% in the same period. The Business One of the main issues in the sector is that all the assets are mostly under concession from the government, but with the latest news on concessions, where the Federal Audit Court authorized the government to renew for another 30 years the concessions for electricity distributors whose contracts expire between 2015 and 2017, the situation is more stable now as compared to that a month ago. This is good news for ELP, as in the Q2 earnings conference call, the company did not know if its distribution concessions would be prolonged. As for electricity production, the situation with ELP is much more stable than it is with CIG, because ELP has only 5% of electricity production in doubt for 2015, whereas CIG had 45% of production in doubt, and eventually lost it. According to ELP’s CEO , the company will bid to renew the concessions and are pretty sure it will happen. The two plants in question are the Parigot de Souza and Mourão plants. ELP is also developing new projects, building 2,000 km of new distribution lines and developing new wind farms, with three new farms expected to start up in upcoming weeks. Fundamental Analysis The current P/E ratio is 7.91, and the price-to-book value is 0.6. In Table 1, you can see the main fundamental indicators for ELP and their stability in the Brazilian currency. Table 1: ELP Fundamentals 2010-2015 (Source: Morningstar ) In the Brazilian currency, ELP is able to transfer the increase in prices to its customers, which shows it to be a great hedge against inflation. The net income is pretty stable for a regulated electrical company, and it can be assumed with a high degree of certainty that ELP will continue to operate less or more positively in the future. The dividend is also stable, and the company has a policy of paying at least 25% of its net profits in dividends. This means that with the trailing earnings, an investor can expect minimally US$0.25 per share at the current exchange rate. This would give a 3% dividend yield at current prices and exchange rates. The gross margin is slowly deteriorating, but we can expect it to improve as soon as the extraordinary circumstances in the Brazilian energy market pass. Technical Analysis The main issue here is not ELP’s business or its fundamentals, but the volatility of the exchange rate between the US dollar and the Brazilian real. In Figure 1, you can see that an end to the depreciation of the real is nowhere to be seen. Figure 1: Brazilian real per US$1 from 2005 to 2015 (Source: XE.com ) I cannot predict what will happen here in the next few years. Currently, the situation in Brazil is far from stable, but in the period from 2009 to 2011, the real appreciated against the US dollar by 60%. We could say that there is blood on the Brazilian financial markets now, and usually, these are the best times to buy. But the main question is: How low can the real go? On the other hand, if we see an improvement in the political and economic situation in Brazil, the exchange rate trend would quickly switch and create a point of stability at a certain level. This trend reversal could give a 25% currency gain and add an extra 25% to the dollar EPS of ELP. This is a scenario that would easily create a 50% return for international investors. But we would need a crystal ball to know when the bottom will be reached in Brazil. Conclusion If ELP were a European or US company, I would probably buy it at these ratios, expecting a healthy 13% yearly return and a 3-4% dividend that would allow me to repurchase shares. With the uncertain situation in Brazil and the real depreciating at a 10% monthly rate (August and September 2015), I want a much wider margin of safety. The margin of safety that I would look for to feel comfortable investing in ELP would be one that gives me a 15% return even if the real depreciates by another 50%. This means that for US$1, we would get R$6. In such a scenario, ELP’s EPS would be US$0.66, and to get a 15% return, the P/E ratio should be 6.66 – meaning that a safe entry-level stock price for ELP is US$4.4. We are still far from that, but everything is possible considering the current situation. ELP is very stable, and Brazil is very unstable for sure in the short term, but potentially stable in the long term. Such a situation makes me believe that there might be a chance of the stock falling a little bit more, and thus, increasing the safety margin for investors. My advice would be put this company on a watch list, estimate your required rate of return for such an investment, adding to that the potential further depreciation of the real, and thus get to a safe entry price for yourself. Comparison with CIG ELP’s price-to-book ratio is 0.6, and CIG’s is currently at the same level. The P/E ratio is 8 with ELP and 3 for CIG, but with the unclear future earnings stream for CIG due to the loss of the concessions on 40% of its energy production, the difference is justified. I do not see potential spectacular earnings growth with ELP, because it is a stable company that aims for sustainable growth, whereas with CIG, everything is possible due to the management’s more risky approach to business. CIG has the potential to bring EPS to $US1.5 per share that would give a P/E ratio of 1.13 at current prices and a dividend yield of around 40%. The risk-reward ratio is 50% downside and 50% upside with ELP, while with CIG, it is 50-100% downside and 600% upside. I will continue to follow the two companies, and if the divergence between the perception the investor community has about Brazil and the businesses’ results continues to grow, thus lowering the potential downside, I will start buying. So, for now, I will put both companies on a watch list and let you know more in the future.