Argonautica

Professional investors can review published thought leadership and market updates from the Argonaut Investment Team.

‘European equities - an overlooked source of income’

Whilst the UK market on a headline basis is the highest yielding major market globally, it is Europe which we believe presents perhaps the greatest source of income opportunities and means by which to diversify one’s income portfolio. It is a market which is grossly overlooked by investors, yet contains a vast array of attractive income stocks – far more than any other major market, with the most dispersion across sectors and the strongest dividend growth rates.

 

The scope in Europe becomes apparent when looking at the potential investable universe. In the chart below we show the stark results of filtering the three major global markets of the US, UK and Europe for stocks with a yield greater than 4% (based on 2019 consensus dividend estimates) and a market cap above €1bn. Perhaps surprising to some, Europe has 2.7x and 2.3x more stocks to choose from than in the UK and US respectively. 

 

Number of stocks with yield greater than 4% and market cap greater than €1bn

 

Source: Argonaut Capital; Bloomberg (12/11/18)

 

Of equal importance is the dispersion of these higher yielding stocks across sectors within each of the markets, giving investors a sense of the diversification benefits of dividends being sourced from different sectors and thus end market drivers. We have broken down the selected investable universe by sector and the table below shows how concentrated (or not) the income stock universe is for each of the three major markets. It is clear that the US is the most concentrated market, with close on two thirds of the stocks found in just three sectors, whilst the stocks in the UK and Europe are more broadly spread across sectors. Key though, from a diversification angle, is that the spread across sectors is different in Europe from the UK (excluding Financials). This is important as it emphasises the potential benefits that European exposure offers to income seeking investors.

 

Sector split of stocks yielding more than 4%

 
Source: Argonaut Capital; Bloomberg (12/11/18)

 

Having established that Europe has the largest number of stocks within our universe, spread across a wide spectrum of sectors, the last remaining question is the dividend outlook. This is crucial, as yield is a function of both dividends (themselves a product of earnings) and price. With the European market having been a laggard and generally under-owned by investors in recent years, the low denominator (“price”) has clearly contributed to some enticing yields. However, to many investors it is the numerator (dividends) that is perhaps of concern. It is thus more than intriguing that within the selected investable universe of income stocks, Europe’s expected dividend growth rates are the highest with the US having the lowest expected dividend growth rates.

 

Consensus estimated median dividend growth rates for stocks yielding greater than 4%
 

 Source: Argonaut Capital; Bloomberg (12/11/18)

 

This key ability to grow dividends and thus the income stream is what marks equity income out from other income generating asset classes. On this metric, the income stocks in Europe deliver handsomely.

 

At Argonaut, we embraced Europe’s hidden income potential when we launched our European Income Opportunities fund almost two years ago. Our income focused approach enabled the fund to not only identify under-valued stocks, but also helped to avoid some of the more over-priced, “growth” areas of the market. As a consequence, since launch, we have been delighted to have delivered a net yield to investors comfortably above the market, whilst also delivering a total return greater than the market. We firmly believe that income-orientated investing does not necessarily mean forgoing capital growth and that, in our view, European equities are an under-appreciated source of income for investors.

 

 

Greg Bennett

Argonaut Capital

November 2018