Along with Germany, France is the most competitive big European economy. As a matter of fact, the country has been able to avoid recession in 2012 and its expected to do the same in 2013 (the IMF expects France to grow by 0.4% this year). Since the country is not as financially troubled as Italy or Spain, most French equities sell at higher multiples than Italian or Spanish companies, but they also offer a lower beta. Here I selected a portfolio of three French companies that can offer you not only value and potential upside, but also great cash yield through dividends.
40% of my portfolio would go to Total , the French national oil champion. I love to own national oil champions like Total or the Italian Eni because their market leadership downstream allows them to have better margins through distribution scale efficiencies and better pricing power. Even if the company appears to be losing long term value given that production volumes have been down by 2% Year over Year (YoY), its not impossible to imagine a rebound to a 4% per year growth from this year to at least 2015.
Another problem that many analysts seem to be afraid of is that Total currently has a low Free Cash Flow (FCF) yield of 2.7%, versus its 6.1% cash dividend yield. I am not afraid of this because the FCF yield is temporarily low given Total´s current heavy Capex phase in deep-water, LNG and oil sands. Those projects will ultimately provide a cash flow boost between 2015 and 2017, so thats when FCF yield should start to normalize well above the dividend yield. Besides, most of that capex will ultimately be financed by Total´s asset disposal plan, which is underway and estimated to collect up to $25 billion in cash. With a great exploratory portfolio, expected 2013 EBITDAX of 17%, and shares trading at 2013 7x P/E and 6x EV/EBITDAX, I think that Total is a great alternative for any portfolio looking for value and a good dividend yield.
40% of my portfolio would be in Danone (NASDAQOTH: DANOY), a France Consumer Goods Company (CGC) operating in four business lines: Fresh Dairy Products, Waters, Baby Nutrition, and Medical Nutrition. As with all correctly managed CGCs its a cash cow, but it is facing challenges ahead. Those challenges are mostly related to weak market trends in many of the European markets where Danone operates. I consider most of those problems to be related to the anemic European economic situation. That said, I think Danone´s FCF yield is poised to ameliorate thanks to shareholder pressure on management to exercise better cost control. Most of that pressure is being applied by Mr Peltz, the activist investor who has recently bought 1% of Danone´s shares. Peltz is expected to ask for cost cuts and a more disciplined use of cash, including possibly a 100 basis point improvement in operating margins to 15.1% by 2015 and the return of all excess cash flow in the form of share buybacks. Meanwhile, the company is trading at 2013 16x P/E and 10x EV/EBITDA. Besides, its paying a 3.4% dividend yield. I believe that Danone could represent a good long term buy opportunity.
Finally, 20% of my portfolio would go to France Telecom , the main French telecom operator which has greatly underperformed the French index for some time now. As almost all telcos in the developed world, the company is suffering margin compression from increased competition, but I think its time to go long. The reason is simple: the market trends for the industry are finally turning and the company is cheap. It seems like investors have already discounted the worst. The stock trades at a discount to peers on 2013 4x EV/EBITDA and 8x P/E. Still paying a 10% cash dividend yield with a 14.7% FCF yield, I think France Telecom should be a part of this portfolio.
As all investors already know, Europe is going through a tough crisis, and companies are suffering pressure on their income statements. Even with this tough scenario going on, it might make sense to start taking a look at European companies. If your are thinking of France, this portfolio could make sense for you. It's a blue chip portfolio that will generate a 5.8% cash dividend yield offering huge upside if the crisis is ever done. And at some point, it will be.
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