International stocks are trading at a 35% discount to U.S. stocks according to Russ Koesterich, Chief Investment Strategist for BlackRock. Dividend investors looking for undervalued foreign stocks should take a look at Royal Dutch Shell plc (ADR) (NYSE:RDS.B), Eni SpA (ADR) (NYSE:E), and Total SA (ADR) (NYSE:TOT).
Still Room to Run
Koesterich believes that, overall, stocks can keep moving higher because he doesn’t expect the Federal Reserve to up rates since inflation isn’t a threat right now. While that would be good for U.S. equities, he is particularly fond of foreign stocks. “On a price-to-book basis, international developed markets are trading at a 35% discount to US stocks.”
Although Koesterich notes that Europe is still struggling financially, oil majors out of Europe offer dividend investors notable yields, relatively steady businesses, and access to the world’s seemingly insatiable appetite for oil.
Best Risk/Reward Option
Royal Dutch Shell plc (ADR) (NYSE:RDS.B) is among the world’s largest integrated oil and natural gas companies. With a recent yield of around 5.3%, it yields nearly twice as much as Exxon Mobil Corporation (NYSE:XOM).
The two companies, though, have notable similarities. For example, they both have global businesses and well recognized brands. Each provides investors a way to participate in oil and natural gas from the well to the gas pump. And both companies bet heavily on U.S. natural gas when natural gas prices were peaking.
Of course Royal Dutch Shell plc (ADR) (NYSE:RDS.B) has a material business in financially weak Europe, but that isn’t enough to justify such a large yield premium to Exxon Mobil Corporation (NYSE:XOM). In fact, Royal Dutch Shell plc (ADR) (NYSE:RDS.B) has notable experience in liquified natural gas, which is used more frequently in Europe than in the United States. That could put it in better position to benefit when natural gas prices recover.
Royal Dutch Shell plc (ADR) (NYSE:RDS.B)’s profit margins are hovering around 10%, that shows that it isn’t as efficient as Exxon Mobil Corporation (NYSE:XOM), which boasts profit margins in the mid teens. Still, with a yield twice as high as Exxon Mobil Corporation (NYSE:XOM)’s and long-term debt making up less than 15% of the capital structure at the end of the first quarter, Royal Dutch Shell plc (ADR) (NYSE:RDS.B) is probably one of the best options in the oil patch today.
In the Risky Fields
Eni SpA (ADR) (NYSE:E) hails from Italy. As far as Europe goes, that’s one of the worst performing countries, with an unemployment rate of around 12% at the end of the first quarter. However, Italy is uniquely situated in close proximity to Africa and the Middle East, which have notable oil and natural gas assets.