Europe’s Unloved Dividend Stocks Flash Buy at Morgan Stanley

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As one of the most successful European stock strategies since the financial crisis unwinds, Morgan Stanley says it’s time to step back in.

An index by the bank that tracks companies with high and sustainable dividends hasn’t fared this badly versus the Stoxx Europe 600 Index since at least January 2013. The gauge, whose members include drugmaker Sanofi and network-equipment maker Ericsson AB, has tumbled 13 percent this year, more than twice as much as the regional benchmark.

An uptick in bond yields from Germany to the U.S. driven by speculation of higher interest rates by the Federal Reserve and a shift into equities more dependent on the economic cycle has put dividend stocks out of favor with investors in recent weeks. The extent of the rout make such shares attractive again, says Graham Secker, the London-based head of European equity strategy at Morgan Stanley.

“Interest rates and bond yields may go up a bit, but they won’t go up enough to derail the dividend-yield play in the long term,” he said. “We’re going to be in a low-growth world with low bond yields for a while, this is just a temporary blip. There’s a place for having a bit of a dividend strategy within your portfolio.”

Dividend stocks, considered safe, income-paying investments, have fallen 29 percent since they peaked in April 2015. Companies such as Sanofi and Ericsson have lost at least 29 percent. The drugmaker has a payout ratio of about 4.2 percent, and Ericsson yields 6.4 percent, compared with just 3.6 percent for the Stoxx 600.

The Morgan Stanley index lost 0.7 percent on Tuesday, while the Stoxx 600 dropped 1 percent.

A move out of defensive, high-yielding stocks into so-called cyclical shares has picked up pace since the end of June, even as economists’ estimates for euro-area growth in the three years through 2018 have been revised down in the aftermath of the U.K.’s secession vote. Driving the Stoxx 600’s recovery have been industry groups typically sensitive to economic trends -- banks, carmakers and technology firms. Health-care companies, utilities and telecommunications firms, traditionally viewed as high-paying stocks, performed the worst.

“People believe that we’re nearing some sort of inflection point for interest rates and bond yields,” said Morgan Stanley’s Secker. “There’s a whole new debate about how stimulus will move from monetary policy to fiscal policy. I do think that this is the direction of travel, but it will occur much more slowly and to a lesser degree than people might think.”

(Updates with Tuesday’s close in sixth paragraph.)
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