Most investors fail to look beyond their home country's borders for investment opportunities. That's a shame because great businesses can be found all around the world.
Want proof? We asked a team to highlight an international stock that they believe is a good choice for income-focused investors. Here's why they picked Sanofi (SNY 0.79%), Seagate Technology (STX +0.00%), and National Grid (NGG 3.34%).
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A quick turnaround
George Budwell (Sanofi): With an annualized trailing dividend yield of 6.94% and a reasonable payout ratio of 79.2%, French pharma giant Sanofi may be a particularly appealing stock for investors looking for top-notch income opportunities abroad. However, they may want to consider this pharma titan before its stock climbs much higher. Sanofi's stock, after all, has produced an outstanding 35% total return on capital over the past 12 months, making it one of the best-performing large-cap pharma equities during this period.
Sanofi's shares have steadily been marching higher lately for two core reasons. First, the company's reorganization efforts have helped to blunt the impact of generic competition for its top-selling diabetes drug Lantus, whereby keeping its top line moving in the right direction. Sanofi's annual sales, for example, are forecast to rise at an impressive compound annual growth rate of 9.08% over the next two years.
Second, the recent Food and Drug Administration approval of Sanofi's anti-inflammatory medicine, Dupixent, as a treatment for adults with moderate to severe eczema should keep the growth party going for a while longer. By 2023, for instance, Dupixent is expected to generate nearly $3 billion in annual sales and become one of the best-selling drugs in the world, according to EvaluatePharma.
All in all, there aren't many high-yield stocks that can offer both respectable growth prospects, and a payout ratio that won't keep you awake at night. Sanofi's stock, though, appears to be one of the few rare exceptions.
"Store" this 7% yield away for a long time
Sean Williams (Seagate Technology): When it comes to high-yield international stocks, perhaps none offers a more delectable yield than data storage solutions provider Seagate Technology.
On one hand, investors have to be aware that the company's current yield of 7.5% is a factor of both a falling share price (its shares are down 12% year to date) and weaker near-term results. For example, Seagate's fiscal fourth-quarter sales of $2.41 billion dropped from $2.65 billion in the year-ago quarter and missed Wall Street's expectations. The company blamed the weaker sales from enterprise customers in China, as well as weakness in data storage systems in Q4. Since yield is a function of share price, Seagate's share price weakness has lifted its yield to north of 7%.
However, these short-term concerns should give way to long-term growth.
Seagate has devoted practically all of its attention to growing its cloud-storage solutions. Of the 62.2 exabytes shipped in the fourth quarter, 23.4 went to enterprise customers. Of that 23.4, roughly 90% was designated for nearline applications, such as cloud computing, content delivery, and backup services. This push into the cloud --which is set to grow significantly larger because of growth in the internet, Internet of Things, big data analytics, mobility via smartphones, and media-rich video -- has been a transformative factor that's helped lift Seagate's margins. After its quarterly adjusted gross margin hovered between 22.7% and 27.2% in 2016, it jumped to between 28.9% and 31.8% in all four quarters of 2017. Expect the cloud to continue to drive results, and higher margins, for Seagate.
While the company's client and consumer businesses, which include consumer electronics as well as desktops and laptops, should continue to provide healthy cash flow, innovation within its enterprise segment will also be a driving force. Earlier this year, Seagate unveiled its 12 terabyte (TB) helium enterprise drives, allowing it to escalate its product offerings to enterprise customers and go toe to toe with main rival Western Digital (WDC 2.84%). Seagate's CFO believes it could have 50% of the exabyte share within the 10 TB and 12 TB market by the end of the current calendar year.
Though cyclical, Seagate has a lot to offer patient income- and value-seeking investors over the long haul.
Not your average utility
Brian Feroldi (National Grid): When investors think of the utility sector, they most likely picture a series of power plants that crank out electricity by burning fossil fuels. That association makes sense since it is what most utilities do. However, that's not how National Grid operates.
Rather than make power itself, National Grid is almost exclusively focused on owning assets that link power producers and consumers together. This primarily consists of electricity and gas lines that are spread throughout the U.K. and northeastern U.S. By focusing heavily on transmission assets National Grid doesn't have to worry about fluctuating fossil fuel prices. In turn, its business is incredibly predictable, which allows management to safely pass along the bulk of profits to shareholders in the form of a rising dividend (which at current prices yields 4.6%).
So how does a company focused on transmission assets grow? The answer is that regulators allow National Grid to raise prices every now and again to ensure that it earns acceptable returns on investments that beef up its infrastructure. Regulators know that they need to incentivize companies like National Grid to do so -- otherwise, the grid wouldn't be nearly as reliable. While the returns vary from region to region, National Grid is typically allowed to earn between 8% and 14% on asset improvements. Given the healthy return potential, National Grid expands its asset base (and hence its earnings) by about 5% to 7% annually.
While high-single-digit growth won't cause National Grid's stock to double anytime soon, the low-risk nature of its business model makes this a stock that investors can count on. When adding in the modest growth potential, I think National Grid is a great stock for investors who crave stability.
