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At midpoint of 2012 the ASX XAO (All Ordinaries Index) has dropped 11%, registering the second consecutive yearly decline.  Gone are the heady days of the great resources boom that seemed destined to propel our share market upward with only momentary interruptions.  In its place we find a seemingly never ending series of trading days rocked by wildly volatile swings some market historians claim have never been seen before.  Yet as grim as things seem to be for the ASX, it needs to be said that in the past 76 years our market has logged two consecutive years of negative returns only seven times.

However, those with a bearish view of the world as it now exists tell us there has never been such a confluence of events and forces driving markets without regard to fundamentals.  Although you may have read this is a “news” driven market, that truth exists only in the minds of those who fail to look beyond the obvious. 

Some “news” of the ten o’clock hour morphs into a “report from an informed source” by the eleven o’clock hour, to a “rumour” by the twelve o’clock hour, to a complete falsehood by the end of the day.  Positive news is met with a deluge of skeptical analysis from the bearish and negative news is met with positive spruiking from the bulls. 

The battle of conflicting analysis rages around economic and political events in China, the United States, and Europe.  Equally caught up in the confusion is a decline in commodity prices and agonizingly slow growth rates.  In Australia we have the added woes of a strong Australian dollar, turmoil in traditional retail and media sectors, and above all competition for equity investment dollars from high term deposit rates.  In the United States panicked investors find few places to go with their money to get a yield above laughable.  Here in Australia, strong term deposit rates are attracting our investment dollars as safe havens with respectable yields.

While each country has its own macroeconomic woes, the linchpin connecting us all is the European debt crisis.  The European Union is China’s leading export destination and slowing growth and panic over a collapse of the Euro and the European Union are impacting growth in China as well as in the United States.  The situation in Europe has led to a dizzying array of analysis and prognostications from global financial experts. As the crisis appeared ready to boil over with the Greek fiasco immediately followed by the Spanish cries for help, applying simple common sense to the long string of efforts to deal with the situation appear to show a clearly discernible pattern.

The scenario has played out in super slow motion with pronouncements that action will be taken followed by delays and then summits where ideas are born only to suffer a quick death when the European Union’s strongest economic member, Germany, says “Nein.”  To date, what Germany wanted to see happen, happened.  “Ja” to austerity measures many economists predicted would slow growth to the point of recession and beyond and “Nein to Euro bonds and direct investment of rescue funds into ailing banks instead of to sovereign governments.

Little wonder then that the world investment community yawned at the prospect of yet another summit of European leaders recently.  German Chancellor said “not in her lifetime” to the Italian and Spanish request to have ECB rescue funds go directly to their ailing banks instead of going on the already debt laden sovereign balance sheets.  And in perhaps the most surprising and meaningful turn of events to date, the Germans confounded us all by replying “Ja” instead of the universally anticipated “Nein.”

Market euphoria over this surprising and stunning turn of events appears to be lasting a little longer than previous euphoric spurts in reaction to a positive crumb of news from Europe.  Yes we already have the doomsday prophets claiming it won’t be enough and the Euro zone will crumble in time.  However, to the average person, the fact that the Germans were willing to accept the previously unacceptable is pretty solid evidence they are committed to holding the whole thing together, and do whatever it takes.

So maybe it is time for investors here in Australia and elsewhere to accept the previously unacceptable as well – European blue chips are on sale, and some at big discounts.  Volatility is not going away, but over the long term, those who buy companies with handsome dividends at attractive valuations should do quite well

Here are seven European shares that qualify, although some have suffered less severe price declines.  The numbers reflect their trading on the New York Stock Exchange through the American Depository Receipt system (ADR).  In the first table we are going to look at price action and dividend yield.  Instead of listing the current share price against the 52 Week Highs and Lows we are going to look at the percentage variance between the current price and the highs and lows as a better measure of volatility.  Here is the table:

Company

NYSE Ticker

Sector

Share Price

% Below 52 Week High

% Above 52 Week Low

Dividend Yield

Telefonica

TEF

Telco

$13.14

-39.46%

+20.55%

16.09%

Siemens

SI

Industrials

$84.56

-36.38%

+8.58%

4.6%

France Telecom

FTE

Telco

$13.11

-30%

+14.6%

13.83%

Total

TOT

Energy

$45.50

-18.33%

+17.70

6.64%

Sanofi

SNY

Pharmaceutical

$38.02

-1.75%

+28.72%

4.44%

Unilever

UL

Consumer Discretionary

$34.07

-1.07%

+17.83%

3.64%

Vodafone

VOD

Telco

$28.09

-.0.74%

+24.95%

5.26%

 

As you can see, the last share on the list, UK Telecommunications giant Vodafone (NYSE:VOD) has rallied almost 25% above its year over year low and is now less than 1% below its high.  Here is their one year price chart from Yahoo finance:

 

If ever there was a chart to highlight the benefits of the Buy on the Dips strategy, this is it.  Note the extreme drops following some market panic event and the subsequent recoveries.  If you are one of the few who still believe in she’ll be right mate and have been buying stocks like this on the dips, you are staying afloat and in VOD’s case earning a respectable dividend as well.  They are the second largest wireless service provider in the world (behind China Mobile (NYSE:CHL) and the largest in Europe.  Their customer base spans 66 countries around the world and numbers over 250 million.  If you know the US market you know the primary national providers there are AT&T and Verizon.  Vodafone owns 45% of Verizon in a joint venture.  Last year that arrangement allowed VOD to pay a special dividend not reflected in their current 5.26% dividend yield.  There are no guarantees in the share market or in life, but VOD is supposedly considering issuing the special dividend again this year.

Dividend yield along with current valuations are two of the major reasons financial managers and advisers are looking to invest in European stocks.  However, here in Australia those dividend yields compete against strong term deposit rates.

As you know, current term deposit rates here vary by institution and deposit amount, but it is safe to say the range is between 3% and 5%.  Every share in our table is yielding within that range and offering the opportunity for capital appreciation over time.  If you haven’t done so already, check the business pages around the world and you will see more and more financial advisers are saying it is time to buy Europe.

Now let’s look at the chart for the stock with the largest drop from its high (36.38%) and the smallest recovery from its low (8.58%) – German industrial behemoth Siemens (NYSE:SI).  Here is their one year chart:

 

Siemens is the most diversified company on the table delivering high tech products to industrial, energy, healthcare, and infrastructure companies.  They have been in business for 165 years and have obviously been able to weather many an economic storm over that time.  How well will they weather this one?  Let’s look at some key valuation ratios and performance measures for our seven European companies:

Company

NYSE Ticker

P/E (Forward P/E)

P/EG

ROE

Operating Margin

Debt/Equity

Telefonica

TEF

2.89 (6.77)

0.22

23.45%

16.02%

2.57

Siemens

SI

13.86 (9.21)

0.66

13.63%

8.29%

0.47

France Telecom

FTE

7.24 (6.79)

8.05

13.75%

17.55%

1.24

Total

TOT

6.77 (6.17)

0.95

17.97%

14.5%

0.32

Sanofi

SNY

13.98 (9.21)

0.66

10.42%

16.35%

0.22

Unilever

UL

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