Stock Watch

High Yields From Foreign Stocks

These overseas businesses have always been generous with cash dividends.

By Andrew Tanzer, Senior Associate Editor, Kiplinger's Personal Finance

April 5, 2010

There’s a lot to like about stocks that disburse high and rising cash dividends. Dividend growth helps you stay ahead of inflation. And because corporate earnings are more than twice as volatile as dividends, prices of cash-paying stocks are less jumpy than those of nonpayers.

In its May 2010 issue, Kiplinger’s Personal Finance described 15 blue-chip U.S. stocks with special appeal to dividend fans. But that’s just half the story. High-dividend-growth strategies work globally, too. “Studies done all over the world show that dividends have been a strong clue over time to superior returns,” says Thomas Shrager, who co-manages several funds for Tweedy, Browne, including its Worldwide High Dividend Yield Value fund.

Though there’s been more emphasis on dividends lately in the U.S., domestic stocks on the whole still offer some of the lowest yields in the world. Standard & Poor’s 500-stock index yields 1.9%, while the MSCI EAFE index -- a widely followed measure of stocks in developed foreign markets.-- offers 2.9%. And when foreign companies have extra cash, they’re less likely to buy back their stock in lieu of paying cash dividends. “Once you invest globally, you’re in a much better environment for dividend strategies,” says Cliff Remily, co-manager of Thornburg Investment Income Builder Fund, which invests around the globe. The five foreign companies below yield from 3% to 6% and have the ability to raise dividends regularly and substantially. Each trades on the U.S. market in the form of American depositary receipts (prices and other data are as of the close on April 1).

British American Tobacco (symbol BTI), $70.14. Most of the economic growth in the world today is emanating from developing nations. So let’s start our hunt for attractive dividends there. We particularly like the theme of tapping into rising consumer spending through multinational corporations.

As incomes rise, people eat, drink and smoke more. They also seek the quality and cachet of brand-name products. A classic example of a company that benefits from this trend is BAT, the world’s second-largest cigarette maker, after Philip Morris International. Rajiv Jain, manager of Virtus Emerging Markets Opportunities Fund, estimates that BAT generates 65% of its profits from developing countries. It reigns in big ones, such as Brazil, India and Malaysia.

Tobacco is an ugly product, but the economics of the business is a thing of beauty. Producers have minimal capital-spending requirements, they enjoy pricing power, their returns on capital are towering, and they generate copious cash flow. That enables the companies to pay generous dividends. BAT’s dividend has compounded by 19% annualized over the past five years. The stock yields 5.1% and sells for 14 times estimated 2010 earnings.

Unilever (UN), $31.29. Like BAT, Anglo-Dutch Unilever has been selling stuff to consumers in the developing world for more than a century. The food-, household- and personal-products giant generates half of its $57 billion in annual sales from emerging markets, up from one-third as recently as 2004. Unilever’s brands include Lipton tea, Flora margarine, Ben & Jerry’s ice cream, Dove soap and Axe deodorant.

Unilever already serves hundreds of millions of customers a day. But the company is far from exhausting its opportunities. China, India and Indonesia, where Unilever has planted deep roots, have a combined population of 2.7 billion -- almost nine times that of the U.S. But Americans spend ten times as much per capita on ice cream, shampoo, detergent and skin-care products, all big Unilever businesses. Unilever is the global leader in ice cream and skin products, along with tea, deodorant and salad dressing.

The second part of the Unilever story is its restructuring. The company lags competitors such as Procter & Gamble and Nestlé by several measures of efficiency and profitability. So Tweedy, Browne’s Shrager thinks Paul Polman, the recently installed chief executive officer, is just the man to weed out inefficiency. Polman was formerly head of P&G Europe and chief financial officer of Nestlé. “I can see a huge ship starting to turn in the right direction,” says Shrager. Unilever yields 3.4% and sells for 14 times 2010 projected earnings.

BP (BP), $57.74. Europe is the place to look for high income from oil stocks. It doesn’t matter whether it’s France’s Total, Italy’s Eni, Royal Dutch Shell or BP -- an enticing yield of about 6% is on offer from all these major, integrated oil-and-gas companies. Compare that with ExxonMobil’s miserly 2.5% yield.

Thornburg’s Remily favors BP for its continued success at adding new oil reserves. Unlike many oil majors, the British company has long replaced more than 100% of the oil it produces with new discoveries. BP produced the equivalent of four million barrels of oil a day in 2009 in locations as varied as Russia, Alaska and Angola. It expects to expand output by 1% to 2% a year until 2015 -- solid volume growth by industry standards. BP shares yield 5.8%.

Taiwan Semiconductor Manufacturing Co. (TSM), $11. Technically, Taiwan is considered an emerging market, but TSMC provides compelling evidence that it’s time for the keepers of such indexes to declare Taiwan a developed country. TSMC is by far the world’s largest semiconductor foundry -- and its largest competitor, United Microelectronics, is a neighbor in the science park where TSMC is located, in Hsinchu, Taiwan.

TSMC’s main business, generating 70% of its revenues, is the manufacture of semiconductors for chip designers, such as Broadcom, Nvidia and Marvell, that lack wafer-fabrication facilities, which are hugely expensive. The rest of TSMC’s sales are to chip makers that are short of capacity, such as Advanced Micro Devices. Simon Hallett, chief investment officer of Harding Loevner, a global investment-management company, says TSMC is the technological leader and lowest-cost producer, with “financial strength that is shining through.”

Financial might is key in an industry that requires billions of dollars of investment in new capacity and research and development each year. TSMC, which should produce net earnings of at least $3.5 billion on $12 billion of revenues in 2010, sets the industry standard. The company has virtually no debt and $6 billion in cash, and it plans to invest nearly $5 billion in 2010. The stock yields 4.3%, unusually high for a technology company, and sells for 13 times earnings. Given that analysts expect earnings to grow at an annual rate of 15% over the next three to five years, the stock appears inexpensive.

Bank of Montreal (BMO), $61.51. For the last pick, let’s travel to our sober neighbor to the north, Canada. While U.S. financial institutions were torpedoing the economy, Canada’s better-regulated, better-capitalized banks prudently stuck to basic commercial, consumer and mortgage lending. Bank of Montreal, founded in 1817, remained solidly profitable through the recession (which wasn’t nearly as nasty in Canada as in most countries).

Bank of Montreal is not as local as its name suggests. It is, in fact, one of a handful of nationwide powerhouses in Canada. It also has a large mutual fund and investment-advisory business. Bank of Montreal has compounded dividends by 11% annualized over the past four years. The stock yields 4.3% and trades at 13 times this year’s earnings.

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