Expand Your Horizons to Find Global Values
It’s human nature to prefer the familiar.
Whether we’re driving, shopping, ordering food or listening to music – all involving choices we make on a daily basis – we display a deep-seated preference for things that are familiar to us.
We’re even more likely to trust someone we’ve seen before, but have never met, over someone we’ve never seen before.
This universal phenomenon is called the mere-exposure effect, and has been studied extensively since the 1960s.
Interestingly, researchers believe it’s a subconscious act of our minds, which means overcoming resistance to the unfamiliar can be a daunting task, even if a course of action is clearly in our best interest.
And investors aren’t immune, either…
Economists have known since the early 1990s that investors prefer domestic stocks over international stocks. This is known as equity home bias.
But this innate desire to fill our portfolios with companies domiciled in our own country can be detrimental to our performance and result in a lack of diversification.
Investors who limit themselves to U.S. companies are ignoring more than half of the global equity market, as well as some of the best value on the planet.
An investor looking for exposure to oil and natural gas producers would certainly consider Exxon Mobil (XOM), which yields 2.6% and has raised its dividend for 32 consecutive years.
However, the best values right now are found in unloved foreign markets.
Outsized returns can be achieved by investing in out-of-favor stocks with good cash flow and healthy dividend yields. That way, we get paid to wait for them to cycle back into favor.
It’s really that simple!
If Benjamin Graham, who’s widely considered the father of value investing, were alive today he’d seriously consider non-U.S. energy stocks.
A nuance for dividend investors to keep in mind when considering ADRs is foreign withholding taxes. For example, France and Norway have 25% tax rates. The United Kingdom, on the other hand, doesn’t have a foreign withholding tax for dividends.
Even after factoring in any additional taxes, these companies still have attractive dividend yields relative to XOM. They also have lower valuations based on book value and cash flow.
The price-to-earnings ratio is a popular metric among investors, but there are better predictors of a company’s true long-term value.
Knowing Everything’s Price But Nothing’s Value
The CAPE (Cyclically Adjusted Price Earnings) ratio was developed by Benjamin Graham and David Dodd. It uses inflation-adjusted earnings over a 10-year period to smooth out fluctuations in a company’s earnings caused by its business cycle.
Using this metric as a guide, STO has significant value at these levels. And this Norwegian oil giant is replacing existing production with new ventures in North America, Africa and the Arctic, which will help the company meet its production goals.
BP is the company that everyone loves to hate due to the Deepwater Horizon oil spill in the Gulf of Mexico. But memories will fade and a downsized BP looks to be one of the most efficient oil producers around.
Lastly, TOT has a world-class yield, but has also recently shown an inclination to increase its dividend. After keeping its payout static for several years, this French oil and gas company began to raise its dividend again in 2012.
As we’ve shown by channeling the late, great Ben Graham, these three foreign energy companies certainly offer hidden value.
These stocks also have great dividend yields, so let’s shed our home bias before they become popular with other income investors.
Safe (and high-yield) investing,
Richard Robinson, Ph.D.