Given the unrelenting stream of bad news emerging from Europe this past year, Gordon felt we were long past due to update some of our European stocks. In some cases these were recommended three or four years ago, long before all the chaos really set in. I'll start off with two stocks that offer relatively good news, which has been in short supply lately. The bad news follows those updates and, as they say on TV, viewer discretion is advised.
Covidien Plc (COV, Financial)
Originally recommended on April 19/10 (IWB #20115) at $51.09. Closed Friday at $52.93. (All prices in U.S. dollars.)
Covidien is a former division of Tyco International. It manufactures medical devices and supplies along with some pharmaceuticals and various other healthcare products. We recommended the stock in April 2010 when it was trading at $51.09. I'm pleased to report that, after a tough stretch last fall, the stock has been very stable and is now trading slightly ahead of our original recommended price. It also offers a decent dividend yield of just under 2%.
The company, which is based in Dublin, Ireland, announced late last year that is will spin off its pharmaceuticals division, a process which it is expected will take over a year to complete. The pharmaceutical segment represents 17% of the business. Depending on the terms, such spin-offs usually benefit shareholders and the move will make the company easier to follow as it will become more of a pure play medical devices business.
In the meantime, Covidien is taking steps to reduce costs and improve margins. It has continued to bring focus to the business through acquisitions of device manufacturers and the sales of divisions which do not fit with the goals of the business going forward.
The company is projecting that sales will grow from 3% to 5% this year, generating free cash flow in excess of $1.9 billion. This will ensure that the company is able to continue paying a dividend. The stock, which closed on Friday at $52.93, is trading at a reasonable p/e ratio of 12.4 times trailing earnings.
Action now: Hold. Healthcare is a relatively safe place to invest your money in these turbulent times.
Diageo Plc (DEO, Financial)
Originally recommended on Sept. 4/07 (IWB #2731) at $85.42. Closed Friday at $99.60. (All prices in U.S. dollars.)
This global manufacturer and distributor of alcoholic beverages is another rare bright spot on the otherwise dismal European scene. Some of its better-known brands include Smirnoff vodka, Johnnie Walker scotch, Capt. Morgan rum, Tanqueray gin, and many others too numerous to mention. The company continues to add to that brand list, recently acquiring a business in Brazil and consolidating some of its outstanding shares in the Chinese white spirits business. Last week, Diageo announced that it had acquired Cabin Fever maple flavored whiskey. I've never had it, but it sounds intriguing.
It stands to reason that some people will drink to forget about their problems and Diageo's results have been steady in an unsteady world. Recent results showed 3% growth in volume, which, combined with price increases, drove organic net sales up by 7%. This led to an operating profit increase of 9%. The company increased its dividend by 7%, giving the stock a yield of just over 2%.
The stock, which began the year at $87.42, is up 14% so far in 2012 and is comfortably ahead of where we recommended it at $85.42. However, it is off 4.6% from its 52-week high of $104.45, so it probably has a little more room to go.
Action now: Hold.
Telefonica SA (TEF, Financial)
Originally recommended on Nov. 6/06 (IWB #2639) at $19.41. Closed Friday at $12.52. (All prices in U.S. dollars.)
Now for the bad news. When we recommended Telefonica way back in 2006, the stock was trading at $19.41. With its attractive yield, great exposure to Latin America, and a toehold in China, the stock looked like a great long-term bet on the improving economic futures of a burgeoning third world middle class anchored by a solid European platform.
Unfortunately, things have not worked out that well since. After our recommendation the stock did rise into the low $30s and looked like it would go higher. But since then it has been battered relentlessly by the global downturn and by the ongoing crisis in Spain. It hit a 52-week low of $10.90 on May 31.
Since then the stock has shown some signs of recovery and the company has continued to pay its dividend. It was yielding over 17% for most of last year however the company recently announced plans to slash its dividend payments by 69% to conserve cash. This may well improve stock price even with the dividend cut but it's still not great news.
The company just announced that it has agreed to sell a 4.56% stake in China Unicom for $1.74 billion, which will certainly shore up their balance sheet and calm investor concerns. The company also plans to sell shares in some of its Latin American and German businesses for the same purpose.
If you're still in the stock, this is not the time to sell unless you believe, and some do, that there is going to be an even deeper meltdown in Europe. If that is your view, I would sell everything that has European exposure. On the other hand, if you believe that we are starting to see the beginning of the end of the European crisis then Telefonica remains an interesting speculative buy at these levels. This past weekend, Spain and the ECB agreed on a bailout plan for Spanish banks which we hoped would see Spanish stocks rallying for at least for the next few days, but that did not happen. The market saw this, ironically, as bad news so looks like we have more uncertainty ahead.
Action now: Hold.
The Santander Group (SAN, Financial)
Originally recommended on May 17/10 (IWB #20119) at $10.44. Closed Friday at $6.19. (All prices in U.S. dollars.)
Everything we said on a macro level about Telefonica goes double for Santander. Fitch just downgraded SAN by two notches to BBB plus from A and the news from Spain just gets bleaker. Santander is the best of the Spanish banks in that it has much more of a global business so it has far less exposure to Spain's crippled real estate industry than the other Spanish banks. But everywhere you look, other than in Canada and the U.S., the banking sector appears to be in grim shape.
Santander is planning to list shares of its Mexican unit later this year which should raise nearly $4 billion and it is unlikely that the bank will require bailout funds. Actually, as the Spanish banking system contracts Santander will benefit in the long term from being the last man standing - but it will be standing in a bad neighbourhood.
Currently the bank is still supporting a huge dividend yield of about 19% but it's likely we will see that cut back. If we ever return to global stabilization and calm in Europe this will be a great stock to own but right on it's just too uncertain.
When we first recommend the stock back in May 2010 it was trading at $10.44 and currently it is at $6.19. I'll keep an eye on this one for possible future re-entry but for now it's a sell.
Action now: Sell.
- end Glenn Rogers
Covidien Plc (COV, Financial)
Originally recommended on April 19/10 (IWB #20115) at $51.09. Closed Friday at $52.93. (All prices in U.S. dollars.)
Covidien is a former division of Tyco International. It manufactures medical devices and supplies along with some pharmaceuticals and various other healthcare products. We recommended the stock in April 2010 when it was trading at $51.09. I'm pleased to report that, after a tough stretch last fall, the stock has been very stable and is now trading slightly ahead of our original recommended price. It also offers a decent dividend yield of just under 2%.
The company, which is based in Dublin, Ireland, announced late last year that is will spin off its pharmaceuticals division, a process which it is expected will take over a year to complete. The pharmaceutical segment represents 17% of the business. Depending on the terms, such spin-offs usually benefit shareholders and the move will make the company easier to follow as it will become more of a pure play medical devices business.
In the meantime, Covidien is taking steps to reduce costs and improve margins. It has continued to bring focus to the business through acquisitions of device manufacturers and the sales of divisions which do not fit with the goals of the business going forward.
The company is projecting that sales will grow from 3% to 5% this year, generating free cash flow in excess of $1.9 billion. This will ensure that the company is able to continue paying a dividend. The stock, which closed on Friday at $52.93, is trading at a reasonable p/e ratio of 12.4 times trailing earnings.
Action now: Hold. Healthcare is a relatively safe place to invest your money in these turbulent times.
Diageo Plc (DEO, Financial)
Originally recommended on Sept. 4/07 (IWB #2731) at $85.42. Closed Friday at $99.60. (All prices in U.S. dollars.)
This global manufacturer and distributor of alcoholic beverages is another rare bright spot on the otherwise dismal European scene. Some of its better-known brands include Smirnoff vodka, Johnnie Walker scotch, Capt. Morgan rum, Tanqueray gin, and many others too numerous to mention. The company continues to add to that brand list, recently acquiring a business in Brazil and consolidating some of its outstanding shares in the Chinese white spirits business. Last week, Diageo announced that it had acquired Cabin Fever maple flavored whiskey. I've never had it, but it sounds intriguing.
It stands to reason that some people will drink to forget about their problems and Diageo's results have been steady in an unsteady world. Recent results showed 3% growth in volume, which, combined with price increases, drove organic net sales up by 7%. This led to an operating profit increase of 9%. The company increased its dividend by 7%, giving the stock a yield of just over 2%.
The stock, which began the year at $87.42, is up 14% so far in 2012 and is comfortably ahead of where we recommended it at $85.42. However, it is off 4.6% from its 52-week high of $104.45, so it probably has a little more room to go.
Action now: Hold.
Telefonica SA (TEF, Financial)
Originally recommended on Nov. 6/06 (IWB #2639) at $19.41. Closed Friday at $12.52. (All prices in U.S. dollars.)
Now for the bad news. When we recommended Telefonica way back in 2006, the stock was trading at $19.41. With its attractive yield, great exposure to Latin America, and a toehold in China, the stock looked like a great long-term bet on the improving economic futures of a burgeoning third world middle class anchored by a solid European platform.
Unfortunately, things have not worked out that well since. After our recommendation the stock did rise into the low $30s and looked like it would go higher. But since then it has been battered relentlessly by the global downturn and by the ongoing crisis in Spain. It hit a 52-week low of $10.90 on May 31.
Since then the stock has shown some signs of recovery and the company has continued to pay its dividend. It was yielding over 17% for most of last year however the company recently announced plans to slash its dividend payments by 69% to conserve cash. This may well improve stock price even with the dividend cut but it's still not great news.
The company just announced that it has agreed to sell a 4.56% stake in China Unicom for $1.74 billion, which will certainly shore up their balance sheet and calm investor concerns. The company also plans to sell shares in some of its Latin American and German businesses for the same purpose.
If you're still in the stock, this is not the time to sell unless you believe, and some do, that there is going to be an even deeper meltdown in Europe. If that is your view, I would sell everything that has European exposure. On the other hand, if you believe that we are starting to see the beginning of the end of the European crisis then Telefonica remains an interesting speculative buy at these levels. This past weekend, Spain and the ECB agreed on a bailout plan for Spanish banks which we hoped would see Spanish stocks rallying for at least for the next few days, but that did not happen. The market saw this, ironically, as bad news so looks like we have more uncertainty ahead.
Action now: Hold.
The Santander Group (SAN, Financial)
Originally recommended on May 17/10 (IWB #20119) at $10.44. Closed Friday at $6.19. (All prices in U.S. dollars.)
Everything we said on a macro level about Telefonica goes double for Santander. Fitch just downgraded SAN by two notches to BBB plus from A and the news from Spain just gets bleaker. Santander is the best of the Spanish banks in that it has much more of a global business so it has far less exposure to Spain's crippled real estate industry than the other Spanish banks. But everywhere you look, other than in Canada and the U.S., the banking sector appears to be in grim shape.
Santander is planning to list shares of its Mexican unit later this year which should raise nearly $4 billion and it is unlikely that the bank will require bailout funds. Actually, as the Spanish banking system contracts Santander will benefit in the long term from being the last man standing - but it will be standing in a bad neighbourhood.
Currently the bank is still supporting a huge dividend yield of about 19% but it's likely we will see that cut back. If we ever return to global stabilization and calm in Europe this will be a great stock to own but right on it's just too uncertain.
When we first recommend the stock back in May 2010 it was trading at $10.44 and currently it is at $6.19. I'll keep an eye on this one for possible future re-entry but for now it's a sell.
Action now: Sell.
- end Glenn Rogers
