Investors shun European dividend stocks

With market volatility showing no signs of abating and continued talk about a flight to quality, are investors seeking a return from the less fashionable companies that pay a healthy dividend rather than investing in stocks trading on racy multiples? We have used Capital IQ to identify the European large caps trading on the most attractive dividend yields and overlayed securities lending data to assess the behavior of institutional investors. In short, these investors are relatively underweight the top 30 companies ranked by dividend yield when compared to their average holdings in Stoxx 600 Index. Companies of note include: Portugal Telecom Sgps Sa (ELI:PTCA), Lundin Petroleum Ab (STO:LUPE), TDC A/S (CPH:TDC), RWE Ag (ETR:RWE) and Cable & Wireless Worldwide Plc (LON:CW).

The average (annual) dividend yield across the Stoxx Euro 600 is 4.2%, up 23% since the market collapsed at the beginning of August, mainly reflecting an average fall of 16% across the Index. Many of the top 30 stocks show exceptionally high dividend yields, a symptom of their dramatic fall from grace with investors.

Taking a sector view, the Capital IQ table below shows that the Telecoms and Utilities sectors record the highest dividend yields of 8.47 and 6.16 respectively and both sectors saw below average share price declines between the 1st August and now. Yet institutional investors who lend are relatively underweight both sectors compared to the Index average owning only 16.1% of the Telecoms and 12.5% of the Utilities sectors. They are relatively overweight the Information Technology sector, which of course trades on the highest P/E multiple of 18.2.

Screening the top 30 European large caps names (see table below), the average dividend yield is 13.3% - a rise of 47% since the beginning of August (well above the Index average), while the average share price of this group has declined by 21%. These changes are partially a reflection that European Financials account for a sixth of stocks within this group, as well as troubled companies such as Pandora (CPH:PNDORA) – which have witnessed sharp falls in their share prices, so flattering their dividend yields.

Across the Stoxx 600 Index, long only investors who lend have increased their average holdings by 1% since August. Yet across the top 30 stocks by dividend yield, they have reduced their stakes by 2.8%. They own an average of 17% of the full index market cap against only 14.1% of the top 30 stocks by dividend yield. Of the stocks where they are relatively overweight, they own in excess of 20% of the total shares of Postnl Nv (AMS:PNL), Home Retail Group Plc (LON:HOME), Cable & Wireless Worldwide Plc and Tele2 Ab (STO:TELE2 B).

The less glamorous Telecoms, Utilities and Industrials sectors account for half of the top 30 list of stocks with the largest dividend yields and it not surprising that institutional investors have brought more heavily into these stocks amid the share price turmoil - of this group of 15 stocks, they have increased their holdings by 2.1% since August, more than double the average for the Index.

The names which have seen the largest increases in institutional investor holdings since August are Portugal Telecom Sgps Sa, Lundin Petroleum Ab, Tdc A/S, Rwe Ag and Cable And Wireless Worldwide Plc.

Finally - it is interesting to see troubled phone manufacturer, Nokia (HEL:NOK1V) at number 27 on the list. The shares have had a torrid year, but rank amongst only two companies in the list to have posted gains since August. Nokia’s progressive dividend policy appears to resonate with investors who remain marginally overweight when compared to the Index average. Alongside the UK’s Home Retail Group it is interesting to see intuitional investors taking a chance on the turnaround of these two challenged firms.