The peak of full-year earnings season is upon us and with it, the bulk of annual dividend declarations in corporate Europe. We’ve decided to look at the year ahead to identify stocks with potential for higher yields in the new year.
We’ve compared consensus dividend forecasts across 83 euro-denominated stocks that are trading at a discount, indicated by 4- and 5-star Morningstar ratings. This rating takes into account a stock's discount to fair value and the uncertainty of the fair value estimate.
Since income is the priority of this exercise, we’ve excluded stocks with dividend yields below 2%, and those with an expected year-on-year dividend growth less than 20%.
Banks feature heavily, with four stocks in the list. According to Morningstar analyst Johann Scholtz, "a combination of sound capital adequacy levels and a material improvement in profitability allows European banks the luxury of being more generous with dividends".
"For ABN and ING the impact of higher rates is delayed by the nature of their lending books (predominately fixed rate) so they should see more resilient net interest income. BBVA and Santander businesses are primarily outside of the Eurozone so less impacted by ECB rate decisions."
The Full List of Undervalued Dividend Growing Stocks
Continental AG (CON)
Morningstar Rating: ★★★★★
Last FY Dividend: EUR1.50/Share
Next FY Dividend Est: EUR1.96/Share (Factset Consensus)
Forward Dividend Yield: 2.7%
Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.
Read Morningstar analyst Richard Hilgert's full take on the stock.
Ageas (AGS)
Morningstar Star Rating:★★★★★
Last FY Dividend: EUR2.10/Share
Next FY Dividend Est: EUR3.21/Share (Factset Consensus)
Forward Dividend Yield: 8.1%
Ageas is an improving business. However, it would do well to take a leaf out of other mid-sized European multi-line books and concentrate on core markets. Ageas has clear strength in its domestic market Belgium, evolving to be the market leader and is a dominant force in long-term savings. Its strategy in this line is to continue with the ongoing shift to unit-linked products that are capital-light despite lower margins. This is probably one of the reasons behind the company’s gradual but upward improvement in ROEs. Investments have played a decent part in improving customer service and protection offerings that can be sold into savings products, and this creates a sticker set of products and customers. These investments have oriented around improving standards of underwriting, and despite raising expenses the net effect in nonlife insurance has been positive. Ageas has a leading health insurance business with expenditure on health in Belgium being one of the highest in Europe. The firm targets price stability and ambulatory care services.
Read Morningstar analyst Henry Heathfield's full take on the stock.
Proximus (PROX)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.84/Share
Next FY Dividend Est: EUR1.20/Share (Factset Consensus)
Forward Dividend Yield: 13.3%
Proximus, the incumbent telecom operator in Belgium, shares broadband leadership with cable peer Telenet, with around 45% and 35% market share, respectively. We believe the Belgian broadband market to be a rational oligopoly where Telenet dominates in the north of the country (Flanders) and Proximus in the south (Wallonia), with the capital Brussels being a more competitive area, given its high density. Proximus has a fixed network presence across the entire country, while Telenet and Voo (another cable operator, acquired by Orange in 2022) operate only in Flanders and Wallonia, respectively.
Read Morningstar analyst Javier Correonero's full take on the stock.
Banco Santander (SAN)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.10/Share
Next FY Dividend Est: EUR0.20/Share (Factset Consensus)
Forward Dividend Yield: 5.5%
Santander generates around 45% of its earnings from its highly profitable Latin American operations. The subscale returns Santander has historically recorded in Europe and the U.S. have obscured the high-double-digit/early-20s returns on equity Santander generates from its Latin American operations. Santander is confident that it can significantly improve the profitability of its European and US businesses, supported by higher interest rates. We wonder if Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio, so that it operates only in areas where it has a clear competitive advantage.
Read Morningstar analyst Johann Scholtz's full take on the stock.
Unibail-Rodamco-Westfield (URW)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.00/Share
Next FY Dividend Est: EUR2.72/Share (Factset Consensus)
Forward Dividend Yield: 4.0%
The group’s assets remain high quality, owning centers that are among the best in Europe and the US. Its iconic assets include the Carrousel du Louvre in Paris, Westfield Mall of Scandinavia in Stockholm, Westfield centers at Stratford and Shepherd’s Bush in London, the Westfield World Trade Center in New York, and Westfield Valley Fair in the San Francisco region. We expect URW's malls to perform strongly as economic conditions normalize and as rival low-quality malls in the US close their doors. However, URW’s large debt load puts the balance sheet under pressure. URW was able to issue debt during the COVID-19 crisis at cheap prices (albeit slightly higher than 2019 levels) but needs to reduce debt.
Read Morningstar analyst Alexander Prineas's full take on the stock.
ABN AMRO Bank (ABN)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.99/Share
Next FY Dividend Est: EUR1.40/Share (Factset Consensus)
Forward Dividend Yield: 10.3%
After emerging from outright government ownership, ABN Amro is one of the simpler banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment.
Read Morningstar analyst Johann Scholtz's full take on the stock.
ING Groep (INGA)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.56/Share
Next FY Dividend Est: EUR1.07/Share (Factset Consensus)
Forward Dividend Yield: 4.0%
In our opinion the highly concentrated Dutch banking system is one of the most attractive banking jurisdictions in Europe. The top three Dutch banks hold upward of 90% of current accounts between them. This level of concentration is in sharp contrast to the fragmented banking systems that typify much of the eurozone. ING is the market leader in Dutch personal current accounts with a 40% market share. ING's market leadership translated into a return on equity, or ROE, of 24% for ING's Dutch banking operations in fiscal 2019, which is substantially ahead of the 6% return on equity of the consolidated eurozone banking system as calculated by the European Central Bank. ING's other operations, outside of its German business, does detract from overall profitability, but ING remains one of the more profitable eurozone banks that we cover.
Read Morningstar analyst Johann Scholtz's full take on the stock.
BBVA (BBVA)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.35/Share
Next FY Dividend Est: EUR0.62/Share (Factset Consensus)
Forward Dividend Yield: 7.7%
The undoubted crown jewel in BBVA's portfolio is its highly profitable Mexican operation. BBVA is the clear market leader in the oligopolistic Mexican banking sector, with 40% of Mexicans receiving their salary in a BBVA current account. This enviable position has supported BBVA's ability to generate ROEs north of 20% in Mexico consistently. Geopolitical tension is leading to a reorganisation of global supply chains, with US firms looking to bring some outsourced activities closer to home. This trend could become a long-term secular growth theme for the Mexican economy, supporting BBVA's revenue.
Read Morningstar analyst Johann Scholtz's full take on the stock.
Telefonica (TEF)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR0.24/Share
Next FY Dividend Est: EUR0.30/Share (Factset Consensus)
Forward Dividend Yield: 7.9%
After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, a strategy we look favorably upon.
Read Morningstar analyst Javier Correonero's full take on the stock.
SCOR (SCR)
Morningstar Star Rating: ★★★★
Last FY Dividend: EUR1.40/Share
Next FY Dividend Est: EUR1.84/Share (Factset Consensus)
Forward Dividend Yield: 6.6%
Scor is a large reinsurance company headquartered in Paris. It operates in over 100 countries, serving many clients from offices worldwide. Scor was established in the 1970s and has grown by acquisitions. This started to take place in the late 1990s with the purchase of La Vittoria Riassicurazioni in Italy. Shortly after this, the business merged with Union des Assurances de Paris. Broader problems for the business began with the mid-1990s acquisition of the reinsurance business of Allstate.
This purchase doubled Scor's share in the United States. The acquired reinsurance portfolio was one of the largest books of small and medium-size business reinsurance and led to some reserve summons. We believe there is one thing that this corporate activity has produced in Scor’s favor, and that is market dynamics. Because of this acquisitive growth for Scor and within the industry, the U.S. life reinsurance industry went through a period of consolidation. Half of the US life reinsurance industry was acquired in the lead-up to 2007. By 2014, the five largest life reinsurers accounted for 90% of US premiums written.
Read Morningstar analyst Henry Heathfield's full take on the stock.
