Position for medium-term upside in yield stocks
We think it makes sense in the current market environment – attractive valuations on
European equities, a constructive medium term outlook but near term uncertainty – to
seek out quality, good value names in the European market. High dividend yielding
stocks are the prime candidates in that regard – and we believe there are many across a
variety of sectors in Europe.
Favourable macro backdrop for European yield stocks
We see four top-down reasons to consider yield strategies. 1) Attractive valuations and
upside in Europe with the equity vs. credit yield spread looking very favorable. 2) Nearterm
volatility makes quality yield an attractive space to build positions, and choppy
markets tend to favour yield strategies e.g. they outperformed in the 2013 taper
tantrum and in 2014. 3) Deflationary growth environment – i.e. PMIs above 50 but
inflation expectations falling – tends to be particularly bullish for yield strategies. 4) ECB
QE extension and renewed falls in bond yields typically favour outperformance of DY
stocks.
Quality yield analysis for sectors supports our OW stance in Banks & Telecoms
Banks and Insurance screen very favorably – offering some of the best combinations of
yield, dividend cover and DPS growth, a high spread of DY versus credit yields (especially
Banks) and positive DPS revisions trends. Telecoms also ranks favorably on DY, spreads
versus credit markets and DPS growth & revisions. Resources sectors offer high DYs but
dividend cover looks weak and our analysts see downside risks to earnings and
dividends.
Screening for quality DY ideas in Europe
Our ‘quality yield’ screen provides a list of stocks offering a blend of above-market,
relatively secure and growing dividends. Financials are very well represented on our
screen (Table 3) – including ING, Soc Gen, Nordea, L&G, Swiss Re and Unibail.
Traditional yield sectors like Telecoms, Utilities and Tobacco are also present – including
Orange, Imperial Tobacco, Snam and ENEL. Expensive defensives i.e. other Staples and
Healthcare are notable by their absence. Several non-resources cyclicals qualify
including BAE Systems, ACS and Royal Mail among industrials, Pearson in Media,
Ericsson in tech and two UK housebuilders.