Updated on October 25th, 2021 by Alberto Maffeis
This is a guest contribution by Alberto Maffeis. Alberto is a Finance and Strategy consultant for a large Sovereign Fund and a Dividend Income investor. Alberto has a passion for Asset Management and Stock Valuation. He created the site Dividend for Life to share some “Value” ideas on companies that he trusts.
It’s clear that we have experienced a bonanza in the U.S. stock market, but only few runs might be left before a correction could bring shares back to a more normal valuation, especially if inflation results in higher interest rates in the future.
International stocks are catching up with the Nasdaq but still show lower valuations. This helps us find some new long-term opportunities.
With this article, I would like to discuss few international stocks that present excellent investment case especially from the dividend perspective:
- Rio Tinto (RIO) and BHP (BHP): the 2 largest mining companies in the world
- Royal Mail (ROYMF): UK postal service and European logistics provider
- Aviva (AIVAF): one of the largest insurance stocks in UK, Ireland and Canada
- Volkswagen (VWAGY) and Stellantis (STLA): #2 and #4 automotive company by number of cars sold
These companies that I am going to briefly analyze might experience a correction as well, but I believe they are in the condition to be highly profitable in 2-3 years from now and generate yearly returns above 10% of their current value (dividend + stock revaluation).
Most of those companies have a deeper analysis on my website.
Rio Tinto and BHP
In 2020 and early 2021, those shares have benefited from commodity price increases, creating massive profit and a large dividend this September.
These are the main advantages of those global giants:
- Very low leverage. Rio Tinto is cash positive ($3B) and BHP could pay the debt with 4 months of its current profit
- Cost advantage in extracting and distributing Iron Ore and Copper
- New large projects coming live in a few years to guarantee new source of revenue. Rio Tinto has new projects in Serbia for lithium and in Mongolia for copper. BHP has finally decided to develop the Jansen mine for potash and a large nickel deal with Tesla (TSLA).
- Shareholder friendly management with an expected dividend above 8%
- Large infrastructure plans agreed in USA, Europe and India
- Commodities usually represent a safe net against Inflation risk
Since July 2021, their share prices have followed a substantial decline in Iron Ore and I believe this could continue until Feb 2022 when China will host the next winter Olympics. China is indeed trying to fight pollution before this very public event, reducing steel production, causing a decline in Iron ore demand.
This could open a large opportunity with a very compelling price for both companies, as the demand for steel is expected to continue for coming years and iron ore price should bounce back close or above $200.
Let me share an example of the dividend potential that a company like Rio Tinto incorporates based on current Iron ore price (accounting for 70% of their earnings).
Table 1: Personal calculation based on Rio Tinto latest presentation
In green, I have highlighted the most likely results based on forecasted production and current iron ore price.
Based on latest Rio Tinto share price ($66.8), its projected 2021 dividend could be higher than 15%. This would be an extremely high dividend yield.
This doesn’t differ much from latest expectation from analysts that are projecting a dividend payment of $11 and $7.16 for 2021 and 2022, respectively.
Another interesting story regarding BHP, is their plan to spin off their Oil & Gas business and merge it with the Australian Woodside Petroleum, where between synergies and gas prices, this could generate a 30% dividend for BHP shareholders and an additional source of dividends.
I am very positive on long term on both companies, and I expect that at least $6-$7 per-share dividend could be maintained while growing their business.
Stellantis is a Dutch company born from the merger between FCA and Peugeot and is listed in the US, Italy and France.
Integration has started this year and it expects to generate 5 billion euros ($5.8 billion) of synergies. In the first 6 months Net Profit achieved almost 8B€ ($9.29 billion), while the current capitalization is 50B€ ($58 billion) with 15B€ ($17.4 billion) net cash.
To understand better its size and the opportunity, let me give you few numbers:
- #2 manufacturer in Europe with 22% market share
- #1 in South America
- #4 (not far from Ford and Toyota) in North America
- #2 in Africa
- Revenue could reach 200B by 2025 with 11% profit margins. Together with Volkswagen and Toyota, Stellantis will be one of the most profitable automakers in the world
- Company is owned by 2 families (Agnelli from Fiat and Peugeot) and both have a very dividend-friendly
- A tax efficient structure its dividend doesn’t have withholding tax
- Top management is one of the best in the industry, having proved in the previous year their ability to restructure companies like Opel and Jeep
- Jeep and Ram has shown also great results in bringing new models and gaining important market share
- New battery technology (developed with Total Energy) looks so promising that Daimler decided to acquire part of their future production. In the latest presentation, team has showed that they expect by 2024, 2 ranges for their batteries (1 above 800km and 1 around 500km)
- Combination of strong brands like Jeep, Ram and Dodge in USA; Jeep, Peugeot, Alfa Romeo and Maserati in Europe
We could expect them to generate around 20B€ ($23 billion) profit and dedicate 40% to dividends (8B€), for 16% yield, all of this without considering the potential share revaluation (up to $50 versus $20 currently).
This German group includes super brands like Porsche, Audi, Bentley, Lamborghini, Ducati and mass brands like Volkswagen, Skoda and Seat, for an overall 2nd position among automakers.
Besides the strength of its brands, I would like to highlight some important factors that can generate growth and profitability for the future
- #1 manufacturer in Europe with 26% market share (and growing)
- #1 in China
- 40B€ EBITDA expected for 2021 (with 34B Net cash)
- 100B€ to be spent in the next 5 years in electrification and Software development
- They invested in one of the most promising Solid State Battery (QuantumScape)
- This not only could increase the range, but also reduce dramatically the recharge time and the costs per battery
- Porsche could install those batteries in late 2023
- Expected 10€ dividend in 2023 (around 5%)
- In 2022, Volkswagen could be the largest EV company by number of cars sold
Even if they are not as shareholder friendly as Stellantis, based on its solidity and its growth potential in EV, I consider Volkswagen an extreme safe dividend. Moreover, we should not be surprised to see a stock revaluation once they will declare to be the largest and most profitable EV company in the world by 2023.
RMG is the National postal service in UKI and it’s also one of the largest European e-commerce distributors with its GLS brand. It’s indeed one of the favorite partners of the largest e-commerce players in Europe.
It’s listed in London (and via Pink shares in USA as well).
It has been going through a restructuring program, trying to shift its business from letters to parcels and reorganizing its workforce with a plan to reduce costs by 300mGBP ($413 million) by 2023.
Currently it distributes a small dividend of 10 pennies (around 2.5%), but with a free cash flow expected to be close to 20% based on last FY numbers. Moreover, management expects to grow revenue by 7-8% yearly driven by the organic growth in the parcel business. It won’t be absurd to think that they could reach 1.2B free cash flow by 2025 for a 30% yield (and without any debt to pay).
Looking at the last 12 months share price trend, the company saw a strong increase up to 590gbp for then decrease back to 416gbp due to the transportation crisis in UK.
This crisis could create a very interesting opportunity, based on technical trends the next support is at 360gpb (10% lower), presenting a very interesting entry point to maximize profitability.
As RMG.LON used to be an important piece for many Pension Funds, I believe they will return to a generous dividend policy, reaching up to 37gbp by 2026.
I personally expect that company could beat expectation and distribute up to 50gbp in 2026.
If the plan is executed well, restructuring is completed and organic expansion follows current trend, Royal Mail Group will be a dominant player with strong cash flow and a double-digit dividend.
Aviva is a UK insurer that its new CEO has decided to focus only on 3 markets (UK, Ireland and Canada) where they have a large market share, and they can focus on organic growth.
This led to multiple disposals including France, Poland, Italy and Singapore gathering a substantial cushion of cash. This cash, close to 7.5BGBP, will be dedicated to reduce debt and reward shareholders
- They have started to buy back shares for a total of 750M GBP (ca. 5%)
- One activist shareholder has requested that 5B to be redistributed but management agreed on a at least 4B distribution
- Likely most of those 4B will be used to reduce the number of share and this would be even more effective if stocks experience a decline in the next months
- On current prices this would be higher than 25% distribution, while the regular dividend is expected to reach 27gbp by 2023 (7% yield)
- In July, the interim dividend was up 5% to 7.35p in line with the dividend policy of low to mid single digit DPS growth over time
Another important point is Aviva could be a good option in case of inflation, as insurers leverage higher interest rates to improve returns on their balance sheets.
Figure 1: from latest H1 2021 presentation