The US dollar strengthened significantly while the euro sold off due to political uncertainties as well as energy and food shortages due to the Russian-Ukrainian war. This has led to the Euro trading at par with the US Dollar, meaning that $1 is now trading at €1 or close to €1. A strong dollar means US. assets are more expensive, but a weak euro means European equities are trading cheaper than historical levels.
In an environment of high inflation and a strengthening US dollar, dividends from European equities could be worth even more than their US counterparts. Therefore, in this article, we’ll look at two of my favorite European stocks that look undervalued and pay monster dividends.
Ruby SCA (XPAR:RUI, Financial) is a French multinational specialized in the storage and distribution of oil and LPG (Liquefied Petroleum Gas). The company’s share price has fallen 63% from its all-time highs in 2018. This decline is due to the secular trend towards green energy and the fact that many pension funds in Europe have sold fossil fuel stocks. But now we see the tide turn in fossil fuel sentiment, as energy security has become a national priority in many European countries thanks to the war. In addition, Rubis is present in many emerging markets such as Senegal, Kenya and Madagascar, which should offer better long-term potential than developed countries which are in the process of reducing the use of fossil fuels.
Rubis delivered strong financial results for its fiscal first quarter 2022, with record volumes up 10% year-over-year. The business also benefited from a rebound in tourism in the Caribbean region and growth areas in Europe, driven by the use of LPG as a motive gas. Its activity in East Africa also shows strong commercial momentum. Gross margin jumped 7% year over year. This increase is due to a 19% increase in the gross margin of the supply/shipping segment.
The group’s overall sales amounted to 1.47 billion euros, up 49% year-on-year. This was mainly driven by higher oil prices and the aforementioned volume growth. Rubis supplies service stations, manufacturers and commercial customers, so it tends to pass on the majority of oil price variations to these customers. This means that society will not benefit as much from the sharp rise in oil prices. But the good news is that this means earnings should be much more stable in the long run. As a capital-intensive regulated entity, the company also benefits from high barriers to entry. It would be unlikely for a Silicon Valley tech startup to say “I want to invest billions in building containers, terminals and infrastructure” for a “dying” industry like oil.
Rubis operates key terminals in Rotterdam, the Netherlands, and the company is expanding into biofuel production by taking over contracts from oil giant Shell PLC (RDS.B, financial), which further diversifies the activity. The company’s refining and logistics activities generate extremely stable revenues due to its business model, which is a major strength.
The company acquired an 80% stake in Photosol France, which is a major supplier of renewable energy. This company has 313 megawatts of solar capacity and has another 101 megawatts under construction. So, despite being in the fossil fuel industry, Rubis has a foot in both camps.
The company pays out a monstrous 7.88% dividend yield, which seems to be sustainable given the growth in emerging markets. The dividend has averaged an 8% CAGR over the past 10 years. Management also bought back shares, which is a positive sign.
Rubis has 996 million euros in cash and cash equivalents for total debt of 1.6 billion euros. This level of debt is quite high but not surprising for a company in the fossil fuel industry.
Ruby is trading at a price-earnings ratio of 8, which is very cheap relative to the sector and its own historical levels. The GF Value chart shows a fair value of €47.12 per share for the stock, making it significantly undervalued at current levels.
Unilever APIs (LSE:ULVR, Financial) is a premier consumer packaged goods company that manufactures just about every type of consumer goods you can think of. It offers over 400 products across many commodity categories to customers in the UK and overseas. Its brands include Ben & Jerry’s Ice Cream, Hellmans Mayonnaise, Dove, Axe, Pot Noodle, Cif antibacterial spray, Domestos bleach and more. The variety of well-known global brands makes this company a true “recession-proof stock”, as many of its products are things that consumers won’t stop buying, even in recessionary conditions.
Despite its dominant position in European consumer goods, Unilever is not resting on its laurels and is actively pursuing a growth strategy through acquisitions. Driven by the involvement of activist investors, Unilever is selling its slowing brands and acquiring faster growing companies. For example, the company agreed to sell its tea business last year to CVC Capital Partners Fund VIII for €4.5 billion, but it kept the part of its rapidly growing tea business in India, in Nepal and Indonesia. The company also acquires wellness brands, such as Nutrafol.
Unilever generated strong financial results for the second quarter of 2022. Its revenue was €15.8 billion, up 2% year-on-year, which exceeded analyst estimates of $192 million.
This was driven by strong underlying sales growth (USG), with underlying sales jumping 8.8% year-over-year. The Beauty and Personal Care segment earned the lion’s share of revenue at 6.4 billion euros. This is followed by the Food and Refreshments segment, which generated 6.3 billion euros. Home care generated 3.1 billion euros in turnover. The large number of products and the diversified income distribution make Unilever even more recession-proof.
Operating income amounted to 4.5 billion euros in the first half of 2022, with a healthy operating margin of 15.2%. Looking ahead, management expects strong underlying sales growth of 6.% and operating margin expansion to 16%.
Unilever pays a healthy dividend yield of 3.72%, which has historically increased at a CAGR of 5%. This is very high for a consumer goods company; while not as impressive as Rubis’ dividend yield, it comes with much greater stability in the underlying business to compensate for it.
Unilever is trading at a forward price-to-earnings ratio of 18.7, 7% cheaper than its five-year average. Additionally, the GF Value chart shows a fair value of £38.79 per share, making the stock slightly undervalued at the time of writing.
The European market is scaring away investors right now, which means there is an opportunity for value-oriented investors who have a contrarian style. The two stocks discussed in this article are, in my opinion, solid inflation hedges. They are also undervalued on a GF value basis and pay attractive dividends.