The U.S. dollar has strengthened tremendously while the Euro has sold off due to political uncertainties as well as energy and food shortages from the Russia-Ukraine war. This has led to the Euro trading at parity to the U.S. dollar, meaning $1 is now trading near or at €1. A strong dollar means US. assets are more expensive, but a weak Euro means European stocks are trading cheaper than historic levels.
Amidst high inflation and a strengthing U.S. dollar, the dividends of European stocks could be worth even more than their U.S. counterparts. Therefore, in this article, we will take a look at two of my favorite European stocks which appear undervalued and pay monster dividends.
Rubis SCA
Rubis SCA (XPAR:RUI, Financial) is a French multinational company that specializes in the storage and distribution of petroleum and LPG (Liquefied Petroleum Gas). The company’s stock price has dropped by 63% from its all-time highs in 2018. This has been driven by the secular trend towards green energy and the fact that many pension funds in Europe have sold fossil fuel stocks. But now we are seeing the tide turn in fossil fuel sentiment as energy security has become a national priority in many European countries thanks to the war. In addition, Rubis operates in many emerging markets such as Senegal, Kenya and Madagascar, which should provide better long-term potential than developed countries which are on a path to decrease fossil fuel use.
Rubis generated strong financial results for its fiscal first quarter of 2022, with record volumes up 10% year over year. The company has also benefited from a rebound in tourism in the Caribbean region and areas of growth in Europe, driven by LPG being used as motor gas. Its East African business is also showing strong momentum on the commercial side. Gross profit popped by 7% year over year. This was driven by a 19% increase in gross profit for the supply/shipping segment.
Overall group sales were a staggering €1.47 billion, up 49% year over year. This was mostly boosted by increasing oil prices and the aforementioned volume growth. Rubis supplies gas stations, industry and commercial customers, so it tends to pass the majority of the changes in oil prices on to those customers. This means the company won’t benefit as much from the large upswing in oil prices. But the good news is this means revenues are expected to be much more stable in the longer term. As a regulated entity with high capital intensity, the company also benefits from high barriers to entry. It would be unlikely for a silicon valley tech startup to say "I want to invest billions into building out containers, terminals and infrastructure" for a “dying” industry like oil.
Rubis manages key terminals in Rotterdam, Holland, and the company is expanding into biofuel production as it takes over contracts from oil giant Shell PLC (RDS.B, Financial), which further diversifies the business. The company’s refinery and logistics operations generate extremely stable earnings due to its business model, which is a strong positive.
The company has acquired an 80% stake in Photosol France, which is a large renewable supplier. This business owns 313 megawatts of solar capacity and has a further 101 megawatts under construction. Therefore, despite being in the fossil fuel industry, Rubis has a foot in both camps.
The company pays a monster dividend yield of 7.88%, which looks likely to be sustainable moving forward given the growth in emerging markets. The dividend has averaged an 8% CAGR over the past 10 years. Management has also been buying back stock, which is a positive sign.
Rubis has €996 million in cash and equivalents with total debt of €1.6 billion. This debt level is fairly high but not surprising for a company in the fossil fuel industry.
Rubis trades at a price-earnings ratio of 8 , which is very cheap relative to the industry and its own historic levels. The GF Value chart indicates a fair value of €47.12 per share for the stock, making it significantly undervalued at current levels.
Unilever PLC
Unilever PLC (LSE:ULVR, Financial) is a blue chip consumer packaged goods company that makes pretty much all the types of consumer goods you can think of. It offers over 400 products across many staple goods categories to customers in the U.K. and internationally. Its brands include Ben & Jerry's Ice Cream, Hellmans Mayonnaise, Dove, Axe, Pot Noodle, Cif antibacterial spray, Domestos bleach and much more. The variety of well-known global brands makes this company a true “recession-proof stock," as many of its products are things that consumers will not stop buying even in recessionary conditions.
Despite Unilever's dominant position in European consumer goods, it is not resting on its laurels, and it is actively pursing an acquisition-based growth strategy. Driven by the involvement of activist investors, Unilever is selling off its slowing brands and acquiring faster-growing businesses. For example, the company agreed to sell its tea business last year to CVC Capital Partners Fund VIII for €4.5 billion, but it retained the part of its tea business that was growing rapidly in India, Nepal and Indonesia. The company is also acquiring brands in the wellness space, such as Nutrafol.
Unilever generated strong financial results for the second quarter of 2022. Its revenue was €15.8 billion, up 2% year over year, which beat analyst estimates by $192 million.
This was driven by solid underlying sales growth (USG), as underlying sales popped by 8.8% year over year. The Beauty and Personal Care segment brought in the lion's share of the revenue at €6.4 billion. This was followed by the Food and Refreshments segment, which generated €6.3 billion. Home Care brought in €3.1 billion in revenue. The vast number of products and diverse revenue split makes Unilever even more recession-proof.
Profit from operations was €4.5 billion for the first half of 2022, with a healthy operating margin of 15.2%. Moving forward, management is expecting solid underlying sales growth of 6.% and an expansion in its operating margin to 16%.
Unilever pays a healthy dividend yield of 3.72%, which has grown at a 5% CAGR historically. This is very high for a consumer goods company; while it's not as impressive as Rubis' dividend yield, it does come with much more stability in the underlying business to make up for it.
Unilever is trading at a forward price-earnings ratio of 18.7, which is 7% cheaper than its five-year average. In addition, the GF Value chart indicates a fair value of 38.79 British pounds per share, making the stock modestly undervalued at the time of writing.
Final thoughts
The European market has investors spooked right now, which means there is an opportunity for value investors who are contrarian in style. The two stocks outlined in this article are solid inflation hedges in my opinion. They are also undervalued based on GF Value and pay attractive dividends.
