Will Europe Kill These 4 Dividend Paying Stocks?
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Earlier this week I discussed some options that investors should consider buying to Euro-proof their portfolios. Now I want to look at names that should be sold to Euro-proof one’s portfolio. This weekend presents yet another EU Summit with the likely outcome a bunch of headline quotes, but no on-the-ground action to stem the sinking economic outlook in the region. This dynamic should raise a red flag on equities that are vulnerable to European weakness. Investors should not automatically take a “buy-the-dip” mentality and should reduce exposure until a clear path to improvement is evident. Capital preservation or rotating into more domestically focused industries and stocks remains the most suitable path for the remainder of the year and possibly for several more years. Below are four higher yielding dividend stocks that could very well underperform in the coming months as the European situation deteriorates.
McDonald’s Corp (NYSE: MCD) is a frequently mentioned stock when investors are seeking out consistency and defensive attributes. Remember the devastation that the Global Financial Crisis brought to the S&P 500- down 37% for the year. Well, investors in McDonald’s realized a total return of +8.5% for the year. That is the definition of defensive. However, the company’s past stability may not be an accurate representation going forward if Europe continues to languish. McDonald’s has been one of the best run companies in the world since Jim Skinner took over in 2004. The stock likely has the right ingredients to be a steady, long-term performer, but could very well be entering a cyclical period of underperformance.
Europe accounts for the largest percentage of sales at more than 40% while the U.S. accounts for 31% of total sales. The company has had tremendous success on the continent since Jim Skinner has become the acting CEO with same-store-sales exploding toward 10% prior to the Global Financial Crisis and staying above 4% throughout the recession. However, the persistent austerity measures may be starting to take their toll. The May Europe same store sales number was +2.3%, and while still respectable, is a clear slowdown from previous results. In fact, since 2007 the trend-line has been clearly downward sloping. Adding a little extra headwind is the currency impact that could surprise investors going forward. It is already a factor, but if the region weakens notably and takes the Euro lower, then earnings estimates will start falling precipitously.
Energizer Holdings (NYSE: ENR) is another dividend paying company that has a history of consistent free cash flow generation. The former pure-play battery company has transformed itself into a 50/50 mix of batteries and consumer products. The company derives more than 40% of sales from Europe, which could be the impetus for underperformance especially since opinions are high on the name. The stock is highly regarded among the sell-side with 12 buys, 2 holds, and 0 sells. It has held-up quite well recently, but this may not persist for much longer. Opposite of McDonald’s, investors might be surprised by the fact that this stock tanked more than 70% during the Global Financial Crisis. While I don’t think one should expect this scenario to unfold again, the battery category is a bit cyclical and when combined with a weakening Europe leaves little impetus for the stock to outperform.
Currency Correlators
Investors need to pay attention to the currency market. While I think it is the most speculative asset pool and should only be waded into by the most skilled traders and never by investors, it does have significant impacts on other asset classes. What is the most overcrowded trade among all asset classes? That would be shorting the Euro. I don’t have a clue what the Euro will do, but I do know that should it implode with a partial or full disintegration of the European Union then the dollar will rally. This creates a double-edged sword for commodity related equities. First, global growth fears will be escalating in the event of a Euro break-up. Secondly, a rising dollar generally puts downward pressure on commodity prices.
To Europroof one’s portfolio, investors should reduce or eliminate commodity related plays, especially metals. Europe is the number one export market for China. Should it struggle in a significant way, then it will certainly be felt in China. China is crucial to metals and material companies and these linkages as well as a rising dollar could make this already beaten down industry fall even further.
Cliffs Natural Resources (NYSE: CLF) is a stock that I like to reference as a U.S. listed company despite being an all-in bet on Chinese growth. Not surprisingly, the stock is exhibiting its usual volatility by being down 50% from its 2011 high. The largest producer of iron-ore pellets in North America is clearly at the whim of Chinese growth, which has not looked good of late. This stock still has plenty of downside if European bearish forecasts prove accurate as well as if China continues to sputter. Stay clear.
Freeport-McMoRan Copper & Gold (NYSE: FCX) is the world’s largest publically traded copper company. The company derives 80% of sales from the red metal (copper) and 20% from the yellow metal (gold). Another Chinese growth derivative play, this stock is suffering as copper breaks down. Front-month copper contracts are at $3.34 a pound versus almost $4.00 earlier in the year. As expected, the stock price has mirrored that of copper and has fallen from $46 to $32. Investors should expect continued weakness in the stock if Europe and/or Asia continue to face deteriorating growth prospects.
Bottom Line
Be mindful of a company’s European exposure before diving in. These links can take many forms from direct sales in the region to strong dependence on currency movements. Also, be careful buying dips when results come in weak as this is likely to last longer than one or two quarters and could be an impetus for a re-rating in the valuation. Instead invest in more domestic based companies or other defensive asset classes until a clear bottom has been established in the region.
market8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and McDonald's. Motley Fool newsletter services recommend Energizer Holdings and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
