European income: feel the quality

European equities remain unloved in some quarters. Many sectors are seen as relatively quotidian compared with the giddy world of the US ‘Magnificent Seven’ technology stocks. 

But look closer and there's a wealth of high-quality companies delivering growth and paying compelling dividends.

Furthermore, with valuations of both growth and value stocks remaining depressed, dividend income plays an ever more important role in total returns. That’s why we think investors should consider European income as part of a broader portfolio.

How does this look in practice?

Sometimes a business is bigger than the sum of its parts. Take Schneider Electric. It makes electrical power products, such as car chargers, circuit breakers, cable accessories and voltage transformers. So far, so every day. Through its products, however, the company is exposed to some of the major trends shaping our future: data centres, electrification, automation and digitalisation.

Schneider is a leading player with scale and sizeable exposure to quality end-markets. It also has a visionary management team, with a track record of identifying industry shifts and opportunities in emerging markets. Its growth relative to its peers has been excellent, as a result. And for the income investor? The company has been increasing its dividend payments regularly. This year, Schneider aims to give back 50% of its profits as dividends.

Many climate-conscious investors avoid high-emitting sectors like energy, transport and industrials. On the surface, this makes sense. But, in our view, we won’t address climate change by only investing in companies with small carbon footprints. It’s important to find businesses with credible decarbonisation plans that deliver tangible real-world results.

Enter oil & gas firm TotalEnergies. It has a well-established, clear and balanced multi-energy strategy. The company was an early mover in renewables and now has significantly higher renewable power capacity than its peers. Total plans to grow energy production by 4% per annum to 2030, driven by gas and low-carbon energies (mainly renewables).

On the business side, it has a strong balance sheet and is expected to move towards net cash over the next few years. This is good news for income investors. Total has a history of increasing its dividends and now plans to give back more than 40% of its cash flow from operations to its shareholders. Coupled with a prospective dividend yield of around 4.5% for 2024 and attractive earnings growth projections, we think the company is poised to deliver an appealing total shareholder return.

On the relatively more glamorous side of investing, we have Inditex. This is the world’s largest fast-fashion group, operating over 7,200 stores in 93 markets worldwide. Its flagship brand is Zara, but it also owns several other popular brands, including Pull&Bear, Massimo Dutti, and Bershka.

We recently visited the company, taking a deep dive into its retail ecosystem, from product design to manufacturing to distribution. It was an insightful meeting, with all channels doing well and the ongoing expansion into the US a huge opportunity. According to the group, sales in 2023 grew 10.4%, allowing the board to announce a 28% dividend increase. With a positive outlook, Inditex is dressed for success and could make an eye-catching addition to any portfolio.

Final thoughts…

The current economic climate is challenging. And, with inflation falling (albeit with bumps along the way), we expect interest rates to come down in 2024. The European Central Bank is forecast to start cutting in June. This is potentially a positive for income stocks as investors are more willing to pay a premium for the dividend yield they offer. Of course, not all companies are equal. That’s why we will continue to focus on those with resilient balance sheets, capable management teams and defined business strategies. Europe has no shortage of such firms. 

Charles Luke is a senior investment director at abrdn.

ii is an abrdn business. 
abrdn is a global investment company that helps customers plan, save and invest for their future.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.