Shares of U.S. companies have soared since 2009 and represent nearly 50% of the global market capitalization for equities everywhere. As other markets languish, still struggling to recover from lingering effects of the financial crisis, foreign exposure in your portfolio can be a tough case to make.
But you might want to take another look at stocks of foreign-based companies.
Exposing your portfolio to other economic cycles can help to diversify the coming rate increases in the United States. Foreign companies often pay higher dividend yields than their U.S. counterparts, some countries like China and Russia ‘encourage’ companies to pay out more in dividends to help stimulate the economy.
The best reason though could be as simple as valuation. The surge in U.S. markets has vaulted the S&P 500 to 20.7 times trailing earnings, well above the long-run average around 16 times earnings. Shares of foreign companies offer much cheaper valuations, stable cash flows and some very persuasive dividend yields.
And three of my favorites are best of breed in their segments.
Potash Corporation of Saskatchewan (NYSE: POT) is the world’s largest fertilizer company by capacity, controlling 20% of the global potash market and third largest market share in nitrogen and phosphates. The pricing system for potash was turned upside down in 2013 when companies stopped agreeing to a price-based system where production was limited to support prices. Prices fell by more than 25% as some companies have lifted production and lowered prices.
Shares of PotashCorp plummeted from $40 per share to $30 and have continued falling this year to around $26 per share. While I won’t attempt to call a return to the pricing system for potash, fundamentals are stable at PotashCorp and the lower prices are keeping competition out of the market.
The company has lifted free cash flow to $1.5 billion over the last two years and has more than enough to protect the 5.7% dividend yield. Shares are trading at 14.4 times trailing earnings which have stabilized and are expected to be higher by 10% next year. An ever-expanding global population will require an increase in food production and crop yields, and that is only going to be possible through higher fertilizer use in agriculture.
Bank of Nova Scotia (NYSE: BNS) is the third-largest bank in Canada with more than $600 billion in assets. Shares have been rocked by the selloff in oil prices as investors fear the bank’s oil & gas commercial clients will leave it on the hook for defaulted loans. Shares have tumbled 33% since July 2014 and are trading at the lowest since February 2010.
The bank has operations in 55 countries with business in retail banking, wealth management, insurance and capital markets. Loan growth in Latin America was reported 12% higher in the third quarter compared to the same period last year and the domestic Canadian market is partially protected by high regulatory fees. Management reported no significant impaired loans in the third quarter though I do believe some might start showing up towards the beginning of 2016 when price hedges stop supporting many explorers.
Fallout from lower oil prices may eventually lead to defaults but the bank has been moving money to its provisional account for future losses. The international and segment diversification will ultimately smooth earnings and investors earn a 4.9% dividend yield to wait out any weakness. Shares trade for 8.6 times trailing earnings, a discount of 41% on the 14.9 times multiple for the Financial Select Sector SPDR (NYSE: XLF) of American financials.
Diageo PLC (NYSE: DEO) is the world’s largest producer of premium liquor with some great brands like Johnnie Walker, Smirnoff, Crown Royal, Captain Morgan and Bailey’s. It owns 14 of the top 100 global distilled spirits brands and 7 of the top 20 brands. The company also competes aggressively in the champagne market with a 34% share and in beer and wines.
Shares fell more than 8% over the week to August 25th on the Chinese devaluation as investors worried that the premium liquors would be too expensive for Chinese consumers. China is less than 5% of the company’s business. While the Chinese market still holds potential, it doesn’t look like the devaluation will do much more than cause a few ripples for the company.
By an accounting convention of valuing inventory at cost, the company could be undervalued by more than five percent. Much of the company’s product, costing relatively little to produce, is aged for many years before selling for a huge premium. Valuing this inventory at cost undervalues the company’s assets.
Beyond the inventory discrepancy, shares are very attractive compared to peers. Shares trade for 18.9 times trailing earnings, a 35% discount to the valuation on competitor Constellation Brands (NYSE: STZ). Premium liquor sales are a little more cyclical than beer and shelf liquor, so the company can expect to see some weakness in a recession. Still, as a vice stock, liquor doesn’t face the same consumer backlash seen in tobacco companies and sales are almost certain to grow between 2% and 4% a year over the long-run. Investors earn a 3.25% dividend yield and strong upside potential in the shares on valuation.
Companies in the S&P 500 book just 33% of their sales outside the United States. The U.S. economy, once the economic engine of the world, now only accounts for about a fifth of the world’s economy. I’m not saying you need to rush out to overweight your portfolio with foreign companies but U.S. investors tend to be extremely underexposed to international stocks. Take advantage of cheaper valuations and strong outlooks to bank some persuasive dividend stocks and upside price potential.
I also like foreign bonds. My favorite right now is a closed end fund selling deep below NAV. The ticker is ESD and it yields over 9% on foreign government and corporate bonds mostly denominated in USD and other hard currencies.
Nice list Ladder! There are are ton of great Canadian Banks trading at a nice discount and offering a juicy dividend yield. I own CM at the moment but honestly, you can’t go wrong investing in any of them. I also like the DEO recommendation considering that I own then add well!
Thanks for putting the list together. Have a great Sunday!
BNS and DEO are in my portfolio. Ini fact I also have two other Canadian banks with oversize yield. TD and RY. Thanks for sharing.