Commentary by Gianmarco Rania, Portfolio Manager at Banor

High-Dividend European Equities

This is a historic moment for high-dividend European companies. Today, it’s possible to build portfolios of European equities targeting a total dividend yield of 6-7%, thanks to particularly favorable conditions for an asset class traditionally considered ideal for long-term investors.

Several factors are contributing to this compelling scenario in which dividend yields are taking center stage.

Let’s take a step back: the COVID period led to an increase in cash reserves, driven by an unusual drop in investments combined with lower or controlled cost structures. These dynamics strengthened balance sheets and boosted profits.

The rise in inflation and the subsequent economic recovery further supported this trend.

It’s worth noting that European companies (as measured by the STOXX Europe 600 index) currently rank second in terms of free cash flow yield, just behind the FTSE 100 – which includes high-cash-generating businesses in the energy, financial, and tobacco sectors.

To the rising dividend yield, we can now add the effect of the devaluation of European stock prices compared to U.S. equities – a dynamic that further enhances the opportunity.

When comparing the European and U.S. markets, we see a dual divergence: on one hand, for instance, the STOXX Europe 600 offers a dividend yield of 3.54% compared to 1.36% for the S&P 500. On the other hand, European and U.S. indices are at their greatest divergence with respect to each other since the 1950s.

Analysts estimate that dividend yields in the European equity market will continue to grow at an annual rate of up to 7% (source: Morgan Stanley).

This trend is also confirmed by the most recent financial statements released by Italian listed companies in recent weeks, which are forecasting higher dividends (see Intesa Sanpaolo and Snam).

Looking ahead, we expect a gradual normalisation of this scenario, supported by various macroeconomic and geopolitical factors that could drive a revaluation of European equities: the ECB potentially cutting rates more than the Fed, the recovery of the Chinese market – to which Europe is highly exposed – the German elections, and the possible resolution of the Russia-Ukraine conflict. However, there is still ample room for growth, making this an attractive and sustainable medium-term investment opportunity.

Another key contributor to total shareholder return is share buybacks – a practice traditionally associated with the U.S. market that is now gaining momentum in Europe, especially in the financial sector. On one hand, we now see total yields reaching double digits (6-7% from dividends plus another 3-4% from buybacks); on the other, there’s the potential for capital appreciation given that European stock valuations remain near historic lows.

What’s surprising is that, unlike in the past, the investable universe has now expanded to almost all sectors – although the most attractive ones remain banking, insurance, telecommunications, utilities, and commodities.

In the financial sector, Poste Italiane stands out as a particularly interesting stock. A leader in fast-growing areas such as life insurance and digital payments, Poste offers exposure to a wide range of financial services without credit risk. In addition, its strong capital position and high dividend yield (close to 7%) make it, in our view, a compelling investment.

On a more international note, in the energy sector, British Petroleum (BP) is worth highlighting. The stock offers a dividend yield of 6.5%, which increases to 8-8.5% thanks to a robust share buyback program. The recent entry of activist fund Elliott into the shareholder base will likely lead to strategic changes aimed at extracting greater value – and potentially increasing shareholder returns even further.

The opportunities currently offered by high-dividend European equities also invite broader reflection on asset allocation choices. Comparing the risk/return profile of a BTP (Italian government bond) to that of a European stock in a regulated business, one can potentially make much more efficient investment decisions – without giving up stable cash flows and with a relatively limited risk profile.

In two words: carpe diem!

Source: Bloomberg, data elaborated by Banor

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Gianmarco Rania is the Portfolio Manager of the Banor SICAV European Dividend Plus sub-fund.