With the economic recovery in full swing, consumer confidence in Europe is the highest it’s been in 10 years.
We’ve picked three European companies that we think can benefit from that trend, and could ride a wave of positive news from the continent.
Deutsche Post deliver about 59 million letters every working day in Germany. But it’s a lot more than a German postman.
Under the DHL brand it offers international shipping and logistics services in over 220 countries and territories and generates around 35% of revenues from the Americas and Asia. It even owns entire airlines.
But despite the overseas business, it’s difficult not to compare Deutsche Post with Royal Mail.
Deutsche Post’s proud of its track record for innovation. It’s experimented with automated robots, drones and augmented reality, and even set up an online grocery business. Royal Mail, by comparison, recently installed its first parcel sorting machine.
Efficiency is driving profits. Deutsche Post’s core postal division improved operating profit margins to 8.6% in 2016. It’s also benefitting from the surge in parcel volumes from the rise in e-commerce. The group has announced record operating profits eight quarters in a row.
Volume growth by region
Source: Pitney Bowes Parcel Shipping Index, 2017
Increasing profitability has seen the group deliver a steady stream of dividends to investors, with analysts predicting a yield of 3.2%.
However, exposure to global trade means Deutsche Post is highly sensitive to economic trends. The dividend didn’t escape the financial crisis unscathed. And we can’t help but notice that the company is trading at a 21% premium to its longer term price to earnings ratio, at 15 times expected earnings.
But for those looking to benefit from the European consumer, and who believe in a long term trend towards online shopping, Deutsche Post DHL is certainly worth considering.
See our Deutsche Post DHL factsheet
Spanish-listed Industria De Diseno Textil, or Inditex for short, is a European giant. A market capitalisation of €82bn means it stands head and shoulders above rivals as the biggest clothing retailer in the world.
The group has seven brands across 94 markets, but it’s the flagship Zara brand that matters most.
New stores and positive like-for-like numbers have helped generate double digit percentage increases in net sales. We’re all the more impressed since the growth’s come at a time of rising online competition.
Others, including UK rival M&S, have struggled to capitalise on the trend of online shopping. But Inditex has risen well to the challenge.
Recent investments in Eastern Europe mean the group now runs online operations in 45 countries. It’s also taken a sensible approach to new sales space. By adding only flagship stores in busy areas, it’s minimised the risk of online sales cannibalising those in-store.
Sales by region
Source: Thomson Reuters Eikon as at 20/02/18
Manufacturing a large portion of the clothes itself gives Inditex a nimbleness that defies its size. This helps mitigate the risk of its ranges missing the mark, a fate that befell UK rival Next last year.
Shareholders have been well rewarded too. Since starting dividend payments in 2002, the group has grown or held the payout every year. The prospective yield is 3.1%, and analysts expect more increases in the future. The fact the dividend is comfortably covered by earnings and free cash flow should instil confidence, but as always, please remember dividends are variable and there are no guarantees.
Overall, we feel there’s plenty of cause for optimism. However, investors should be aware that at 21.9 times expected earnings, the shares change hands at a hefty premium to many rivals. To keep this position, the strong performance has to continue.
See our Industria De Diseno Textil factsheet
Dutch-listed Heineken isn’t Europe’s biggest brewer. But we think it’s one of its best.
Recent acquisitions of the 1,900 pub Punch Taverns business, and the Brazilian part of fellow brewer Kirin, show it’s not shy of a deal or two. But Heineken’s primary focus is on promoting its established brands. These include Sol, Moretti and Amstel, as well as the obvious one.
Creating and maintaining a premium image for its products has helped Heineken serve up a tasty combination of revenue and margin growth in recent years. For shareholders, this has translated into a steady flow of dividends.
The shares currently offer a prospective yield of 1.8%, and analysts expect it to continue a run of dividend increases. It’s seen the payout double over the last 10 years. Past performance shouldn’t be seen as a guide to the future.
While Europe will remain the biggest contributor to group sales, the new brands will broaden Heineken’s reach.
Dividend per share (€)
Past performance isn’t a guide to the future. Source: Thomson Reuters Eikon as at 20/02/18. *Estimated forecast
Increasing wages and population growth in Emerging Markets like Brazil means it’s easy to see the long-term rationale for the Kirin deal. It’s worth noting though that these brands are loss-making at present, and regulation is only likely to tighten.
But we think there are reasons for optimism. The group has a strong position in its key European markets, and selling a premium product to a growing audience means there’s every chance management will continue its already impressive track record.
The shares trade on 19.8 times expected earnings.
See our Heineken factsheet
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are correct as at 16 February 2018 and are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.