Take a Benz to Europe’s Party

The strong dollar has recently made European vacations relatively cheap, and European stocks have been a bargain for much longer.

But since they’ve grossly underperformed U.S. equities for the last decade they also looked like one giant value trap, amid economic struggles and related political ferment.

Americans and Europeans, institutional investors as well as mom and pop – everyone found better uses for their cash.

European stock funds tracked by Morningstar have averaged an annual return of barely more than 1% over the last decade, versus 7% for the S&P 500. The performance gap over the past three years between a representative European ETF and the S&P 500 SPDR (SPY) is no less dramatic.

Last year outflows from European stocks totaled a heavy $100 billion or so – ahead of the continent’s biggest economic boom in decades.

How big? Well, the famously phlegmatic German managers have just pushed their country’s business confidence index to a 26-year high. Consumer confidence across the Eurozone is at a 16-year high. A German index of help-wanted listings is at a record, while in France job openings are up 14% year-over-year.

This economic revival has just powered the best European earnings season in years, and stemmed the fund outflows, though so far only a trickle of that money has returned.

And the best thing about all of this good news is that’s it’s not at all priced into European stocks, which are not only fundamentally more attractive than U.S. and global equities but also much better placed to ride the economic pickup on their home turf.

Over the next two weeks – through Bastille Day – I’ll be recommending four promising European stocks. They will supplement the small-cap ETF already in the portfolio, delivering a decent current yield along with excellent upside if Europe keeps surprising its many doubters.

Today’s pick is Daimler (OTC: DDAIF , DMLRY, DDAIY) the manufacturer of Mercedes Benz sedans as well as Daimler trucks. Earlier this year it paid an annual dividend that yielded 4.76% based on the current price of its American Depositary Receipts.

The payout was kept level from the prior year and should go no lower in 2018. It consumed just 41% of Daimler’s fiscal 2016 net profit, and stayed comfortably within the company’s free cash flow.

Daimler sold 10% more cars last year than in 2015, which translated into 7% revenue and profit growth at the flagship Mercedes unit. But weak demand for trucks kept the company’s overall numbers flat as sales slid in the Americas, Middle East and Turkey.

The truck business should rebound this year while cars extend their gains. And as consumer and business confidence continue to recover, Daimler’s recent investment in a European leasing specialist should also pay off.

This is a cyclical stock in the right place and at the right time of the cycle, priced at 9 times last’s year’s net profit and 5.5 times adjusted earnings before interest and taxes. And of course there is that nice annual dividend.

Note that, thanks to a bilateral tax treaty between U.S. and Germany, U.S. investors are better off holding German equities in an individual retirement account. That way the withholding tax rate on the dividend will be 15%, versus 26% elsewhere.

This doesn’t apply to French stocks, which are a better fit in taxable accounts. But I’m getting a little ahead of myself.


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