Despite the global economy's positive movement, Europe remains under pressure. More recently, the debt crisis facing the PIIG group of countries has returned to center stage. Many fear that the Greek debt situation is getting seriously out of control. Yields on Greek bonds maturing in May 2013 are currently yielding 24.6%. At this amount, many analysts are starting to question the ability of the nation to pay off its bonds without some sort of restructuring. Funds like the iShares S&P Europe 350 Index (NYSE:IEV) have fallen hard in the wake of the recent news. However, many European large-cap companies are healthier than their governments and receive much of their earnings from outside Europe. For investors, the time may be right to add European large caps to a portfolio.
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Why Invest in Europe?
There are a few reasons why investors may not want to give up on the European stocks. The falling euro has been a boon to major exporting European companies such as Germany. A weaker currency gives overseas sales a lift by making the company's product less expensive for customers who pay in stronger currencies. Home to many of the world's largest multinationals, Europe's exported goods become the preferred choice for emerging markets and other developing nations. Analysts estimate that every 10% drop in the Euro could add an extra 0.5% to GDP for the Eurozone. Europe's consumers are also not struggling as much as their American counterparts due to Europe's heavier savings rate.
On a stock metric basis, Europe is cheaper still. The average P/E for the broad S&P 500 is around 14. The MSCI Europe Index trades at just 11 times. This is still below the historical average P/E of the low 20s. Euro stocks are also trading below their historic long-term price-to-book ratios. In addition, dividend yields overseas are larger too. Many European corporations seem to have more of a "dividend" culture, with more companies returning earnings to shareholders. The S&P 500 yields 1.71%, while Europe yields 4.12% (both trailing 12 months as of April 30, 2011). (Investors tend to be adventurous in situations where they feel protected, but risk compensation theory suggests this may backfire. Learn more in Why Investments That "Feel" Safe May Not Be.)
Adding Europe's Strong Contenders
With European stocks offering large dividends and values within the stock market, investors could use the recent renewed weakness to add some exposure to the sector. The broad-based Vanguard European ETF (NYSE:VGK) follows almost 500 different European stocks and only has about 12% of its holdings in the PIIG countries. Investors looking for an easy European play can use the ETF or the more concentrated SPDR EURO STOXX 50 (NYSE:FEZ). However, this may be one of the better times where individual stock picking could come in handy. Investors should first look for financially sound companies that are being indiscriminately sold by the markets.
For example, incumbent phone company France Telecom (NYSE:FTE) has been aggressively moving to diversify away from its home turf. The company has expanded into emerging markets such as Poland, Morocco, Uganda and Guinea. These emerging market operations now make up more than 50% of its business. France Telecom yields a healthy 4.4%. Similarly, investors can look at Spain's Telefonica, S.A. (NYSE:TEF), which has expanded into Latin America. (This ever-changing industry can leave investors scratching their heads. Find out which metrics matter, check out How To Pick The Best Telecom Stocks.)
The stable insurance industry is another area where investors can find big yields. Prudential Plc (NYSE:PUK) provides retail financial services in Asia, the United States and the United Kingdom. The company continues to expand aggressively into Asia. Shares yield 4.6%. For those wanting a higher yield, fellow British insurer Aviva (NYSE:AV) yields more than 7%.
The world continues to crave more and more energy. To that end, oil companies continue to rake in record profits. The triple play of France's Total (NYSE:TOT), Norway's Statoil (NYSE:STO) and Italy's Eni (NYSE:E) can help boost the yield of an energy portfolio. These stocks pay 4.7%, 3.8% and 4.2%, respectively.
The Bottom Line
With Greece's debt worries returning to the forefront of the news, investors are once again shunning European stocks. However, the country still offers high dividends and value for those willing to go against the grain.
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