The Brexit. It’s been called a “Lehman-like” event by some market pundits. An event capable of plunging the United Kingdom, Europe and potentially the world into a deep-recessionary funk. At the same time, it’s also been called “over-blown” and nowhere near as bad as initially thought. Either way, the actual effects of the United Kingdom’s vote to leave the European Union won’t be felt for a long time.
In the here and now, the Brexit has created pretty decent market turmoil and big declines in stocks domiciled in the U.K. – perhaps enough of a decline to get an investor’s value-hood blood boiling. Even more so when you consider some of the rich dividends that U.K. companies are now yielding.
However, not all U.K. stocks will do well. It takes a certain kind to get through the Brexit over the long haul. But betting on these stocks could prove quite rewarding.
The Big Brexit Fall
While the vote itself is potentially a huge problem, it was the shock of the vote that really threw Wall Street and the global markets for a loop. Polls leading up to the event predicted that the U.K. would stay in the European Union by a wide margin. So when “leave” won the referendum vote, investors were not prepared. And markets fell – very hard.
After hitting an optimism-fueled peak before the vote, shares of the main U.K. index, the FTSE 100, have sunk around 6%. When accounting for the mega-drop in the pound sterling versus the dollar, the decline in the FTSE 100 is closer to a 10% drop.
Needless to say, U.K. stocks have especially taken it on the chin thanks to the vote.
But here’s the thing in of all this: the U.K. is home to some of the largest global multinationals on the planet. Where a firm is domiciled has relatively little bearing on where it sells its products or services – at least when it comes to mega-caps.
Ever drink Captain Morgan rum or Johnnie Walker scotch? Well, they are owned by Diageo (DEO ), one of the largest spirit makers in the world. Incidentally, DEO gets less than 17% of its revenues from Europe. British American Tobacco PLC (BTI ) sells far more cigarettes in Asia than it does in Britain. The same could be said for drug makers GlaxoSmithKline (GSK ) and AstraZeneca (AZN ).
And the list goes on. All in all, more than 70% of revenues for the FTSE 100 come from overseas.
The point is that the Brexit should have no effects on their broad range of revenue sources/locations. And when it comes to trading with E.U. nations, many of these British multinationals already follow the E.U. rules anyway and will be required to continue to do so. Perhaps even better, the falling sterling will provide a boost in revenues and profits, as their goods and services are cheaper to foreign buyers.
Which could explain how the FTSE 100 has performed better than the FSTE 250 since the Brexit. The broader index includes much more exposure to smaller market-capitalized companies rather than direct exposure to the British economy.
The Big British Bargain Brewing
Despite the fact that the FTSE 100 is really full of some of the world’s largest global players, the Brexit has the index trading for next to nothing.
When looking at their cyclically-adjusted price earnings ratio or CAPE, U.K. stocks are at roughly 11. That compares to a whopping 25 for the S&P 500. CAPE is seen as a better metric than straight P/Es because it smooths profits to arrive at a long-term average. It kicks out major peaks and valleys that can distort things. The lower the CAPE, the cheaper stocks are, as well as the chance for larger dividends and total returns.
For stocks in the U.K., you’re getting multinational muscle that isn’t really affected by the Brexit for dirt cheap. And as for that dividend yield, the iShares MSCI United Kingdom ETF (EWU), which tracks roughly 85% of the U.K.’s stocks, yields a very juicy 4.10%.
Adding the U.K.’s Multinationals
Given just how large and dominating some of the United Kingdom’s stocks are on the international stage, investors are getting a once in a lifetime opportunity to load up on quality dividend payers for dirt cheap. Investors looking for quick and easy exposure could use the EWU or its currency-hedged cousin the iShares Currency Hedged MSCI United Kingdom ETF (HEWU). HEWU is still yielding a respectable 3.82%.
Another option could be to add some of the nation’s top dogs. Previously mentioned stocks like DEO, GSK and BTI all have long histories of rising earnings, cash flows and dividend payouts. The trio would be at home in any dividend-growth portfolio.
But when it comes to cheap, the U.K’s two big oil firms – Royal Dutch Shell (RDS-A ) and BP (BP ) – are facing the duel threat of the Brexit and low oil prices. With oil starting to rise and its cheapness causing the vote, BP and RDS.A look like crazy good deals and their dividends look even safer.
The Bottom Line
The Brexit could be bad for the global economy, but it has made British stocks crazy cheap. Possibly unjustifiably so. For those investors looking for quality multinationals with large dividends and earnings histories, the Brexit is a big time buy.