Buy the Brexit Dip? (8 Ideas)

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The Brexit vote last Thursday has unleashed a tremendous amount of uncertainty across markets, but as we all know there’s always value at some point (in every market).

My friend Adam Johnson (you may recognize the name – he’s a former Bloomberg anchor) spent the weekend trying to find some opportunity coming out of this Brexit crisis, and he’s been kind enough to share parts of his research with me, and in turn I am sharing it with you.

Specifically, Adam identifies 8 specific UK-based stocks that are potentially worth buying on this dip.

Additionally, he explains what he thinks is the best UK ETF to buy now, if you are looking to try and scoop up UK stocks that are heavily discounted.

Obviously the macro outlook remains cloudy, but as we said, everything is a value at some point.

We hope you find this research useful.

Finally, to receive more single stock research like this, click this link to receive a free trial of Adam’s Bulls Eye Brief, a twice-a-month report that provides institutional level idea generation at a retail price!

Rule Britannia
Eight U.K. Dividend Aristocrats

  • Brexit has skewered UK assets to create significant value among dividend paying companies
  • FTSE 100 Index now trades at a discount to peers despite higher GDP and lower unemployment
  • 16 of 100 FTSE components yield at least 5% compared to zero companies in the DJIA
  • Bloomberg model identifies 8 UK-based companies likely to increase dividends near-term

No man is an island. Unless he’s British. The historic #Brexit vote by 51.9% of the UK population asserts Britain as independent and unbundled from the global bear hug wrought by asset inflating central banks. While perhaps noble in its intent–even refreshing to the fiscally minded among us–stocks plunged 9% and the venerable British Pound dropped to a 31-year low. Then something happened. Buyers stepped in. Take quality assets down far enough and value speaks for itself. UK dividend paying stocks offer particular reward.

Emotion ahead of the vote, as well as the unprecedented plunges overnight have created some compelling opportunities for thoughtful long-term investors. With so many traders betting on a negative outcome, short interest on Sterling futures has soared to new highs in recent weeks. Similar story for the cost of transacting in the options market, where implied volatility on the currency’s options had risen 22%, more than four times the rate on the Euro. (chart from Bloomberg). Incredibly, the GBP spike occurred even as implied vols declined for Brazil and Argentina… which feature Zika and 40% inflation, respectively. Equity markets too reflect angst. #Brexit has wreaked so much havoc on valuation that only Italy trades at a cheaper ratio of price to earnings among Europe’s major markets. Yes, Italy, where unemployment still hovers above 11%, more than twice that of the UK. I’m focused on British dividend paying stocks. Simply put, they are far too cheap and their dividend yields are far too compelling to ignore. Plus, earnings are rising and the cheaper Pound should help exports (assuming bitter EU ministers don’t impose punitive tariffs). Compare Britain to the rest of Europe.

What You Pay vs What You Get

P/E Ratio

16.4x

20.1x

20.9x

22.3x

19.6x

13.5x

Dividend Yield

4.6%

4.4%

3.2%

4.2%

4.9%

4.3%

GDP (YoY)

2.0%

1.5%

1.6%

1.4%

3.4%

1.0%

Unemployment

5.0%

10.2%

6.1%

10.3%

20.4%

11.6%

 

Bloomberg offers users an exceptionally powerful screening function in order to identify value more specifically. In this case, I have narrowed the list of FTSE components to those few companies distinguished both by high dividends currently and a strong likelihood of dividend increases in coming weeks/months. Bloomberg’s dividend forecast model scores an accuracy rate above 91% by incorporating over a dozen factors. Some of these include estimates of cash flow over the next 12 months, historic dividend payout ratios, changes implied by forward options pricing and recent comments by management in public forums.

Here are the key components I incorporated for this screen:

  • Current dividend yield of at least 5%

 

  • Next projected dividend action is “Increase”
  • Forward 12-month earnings forecast to rise

Nine of 100 companies met my criteria. Incredibly, 16 components in the FTSE 100 yield more than 5%, while not a single member of the DJIA yields even 4.5%. This is how cheap UK equities have become. Of the eight I present, all but one trade near three-year lows. U.S. investors will appreciate two of them can be traded via American Depository Receipts, which effectively serve as proxies for the “ordinary shares” trading in London.

Eight UK Dividend Aristocrats

Stock

Sector

Dividend

Yield

Dividend

Growth 3yr

P/E Ratio

Return

YTD

Near 3yr Low

Stock 1 Energy

7.6%

4.3%

30.9x

7.5%

Yes

Stock 2 Fin Svcs

7.3%

19.1%

11.1x

-15.5%

Yes

Stock 3 Fin Svcs

6.9%

6.0%

12.4x

-17.0%

Yes

Stock 4 Retail

6.5%

11.1%

11.7x

-17.8%

Yes

Stock 5 Fin Svcs

6.2%

3.1%

8.8x

-16.7%

Yes

Stock 6 Fin Svcs

5.7%

35.9%

18.3x

18.5%

No

Stock 7 Telecom

5.6%

2.1%

37.6x

-2.2%

Yes

Stock 8 Telecom

5.3%

6.9%

19,4x

-36.0%

Yes


Five additional companies pay notable dividends, but did not make the cut because Bloomberg forecasts the current dividend will remain unchanged while I opted for growth. These include:

  • Alternative Stock 1 Yield of 7.7%
  • Alternative Stock 2 Yield of 5.6%.
  • Alternative Stock 3 Yield of 8.2%
  • Alternative Stock 4 Yield of 7.4%
  • Alternative Stock 5 Yield of 6.8%


In case you are wondering why Rio Tinto (RIO) didn’t make the cut with a trailing 12-month yield of 7.1%, Bloomberg forecasts the company will announce a dividend cut of 50% on August 3. Given Bloomberg’s accuracy of 91%, I will leave beleaguered Rio for someone else.

I recognize some readers prefer one-stop shopping, and two exchange traded funds traded in London fit the bill.

The first currently yields 4.6% and has grown the dividend an average of 11% annually the past 3 years.

However, my preferred UK ETF yields 6.5% and has grown its dividend 12% annually the past three years.

Each includes two of the nine names from my screen, and my preferred UK ETF also includes the five additional names I highlight which are forecast to hold dividends steady and I believe is the better ETF for those looking for broad UK exposure on this dip. A few more essential points on the two funds follow.

UK Dividend ETFs

My Preferred UK ETF

Alternative UK ETF

Dividend Yield 6.5% 4.6%
Dividend Growth (3yr) 11.60% 10.7%
Next ex-Date Mid-September Late-September
Dividend Frequency Quarterly Semi-Annual
Beta (6-month / 12-month) 1.01 / 0.97 0.84 / 0.88
Holdings / Top 10 as % 49 / 29.3% 31 / 46.9%
Top 3 Sectors 13% Investments
12% Insurance

7% Energy

10.1% Agriculture
9.5% Commercial Svcs

9.0% Pharmaceuticals

P/E Ratio (Avg) 14.6x 22.1x
Expense Ratio 0.40% 0.30%

 

Bottom line, there are clients and prospects who want to know that their advisor is looking for an opportunity out of this carnage,
and we believe the names alluded to above can outperform over the medium and longer, and potentially offer substantial long-term returns as Brexit gets worked out.

Click this link to receive thy symbols of the “8 Dividend Aristocrats” as well as our preferred UK ETF.

Value Add Research That Can Help You Outperform

My name is Adam Johnson and I traded oil, stocks and options for several large

institutions before joining Bloomberg Television as an anchor during the financial crisis. I

now write Bullseye Brief to help thoughtful investors like you find opportunity and make

money.

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Thank you for your trust.

Adam Johnson

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