The US global consumer franchise stocks offer the most basic of products or services yet have unique attributes that investors often overlook. They offer defensiveness in their earnings, no financial risk (currently), mixed currency and emerging markets exposure and, following the decade long bear market in equities, better value than they have in possibly two decades.

The enclosed Table A, which highlights the earnings and dividend statistics of the US market (i.e. the Dow Index) and the US global consumer franchise stocks, makes a number of striking points.

The first point is that the overall US equity market was substantially overvalued in late 1999. Investors were paying 27 dollars for every dollar of earnings. Looked at another way, investors were buying an earnings yield of 3.6% (100 / 27.4 = 3.6%) in late 1999 at a time when the US 10-year government bond was offering a substantially higher, and risk free, yield of 6.5%.

The second point is that at that same time in late 1999, the US global consumer franchise stocks were, in aggregate, trading on 35 times earnings and offering a dividend yield of only 0.8%. Hence, these stocks were priced at a significant premium to an already overvalued market at that time.

The third point is that the US market is substantially cheaper today, trading on 14.3 times earnings. The US global consumer franchise stocks are trading on a similar rating, a highly unusual occurrence.

Eoin Treacy's view This additional article "Build your own global income fund" by Mark Robertson for the Investors Chronicle, kindly forwarded by a subscriber, may also be of interest. Registration may be required but here is a pdf.  

Fullermoney has characterised Wall Street as being in a secular bear market for the last decade which we define as a generational long period of P/E ratio contraction and rising dividend yields. This became a contentious opinion from 2006 to the 2007 peak as the Dow Jones Industrials Average moved to nominal new all time highs. However financial markets are quite capable of cyclical bull markets within an overall bear market environment. Arguably, we have been in just such a cyclical bull for more than a year. Dividend yields are rising as predicted for close to a decade, suggesting that investors are increasingly looking for a more competitive income stream in return for the use of their capital.

Global growth continues to be focused on Asia and Latin America's population centres and nothing has happened to suggest this is about to change. Stock markets in the region continue to outperform and regional currencies are comparatively strong. Government bond yields are coming down more from a diminution of the respective countries risk profile rather than quantitative easing. Importantly, Asian and Latin American countries have no need of deleveraging, having avoided the credit crisis, and are actually more likely to leverage up over the coming decade as growth and confidence improve.

There are many ways to participate in this secular theme either through investing directly in these countries, in the commodities they required to fuel their economic development or in the global franchise companies that will benefit from the growth of their specific niche markets. Consumer sectors are outperforming in China, India, Brazil and other major emerging markets. US and European companies with significant operations in these countries are also benefitting and in many cases offsetting the drop off in domestic demand. .

The S&P500 currently yields 2.05% and 10yr Treasury yields are 2.59% so companies such as Johnson & Johnson (3.65%), Kraft (3.96%) WalMart (2.37%) Coca Cola (3.14%) Kelloggs (3.16%), Proctor & Gamble (3.2%), Abbott Laboratories (3.47%), McDonalds (3%) Yum Brands (2%) among others offer competitive yields and the potential for capital appreciation.

Of course there is a trade-off between the yield on offer and the potential for capital appreciation. For example in Europe, Belgacom with a largely domestic Belgian business yields 7.62% and can be compared to Vodafone which has a truly global presence and yields 5.62%. Both are respectable yields, particularly when compared to their respective government bonds but Vodafone with a somewhat lower yield has considerably more upside potential in terms of price action.

This list of shares with a market cap of more than $1 billion, yielding more than 3%, with positive dividend growth over the last 3 years and with dividend cover of more than 2 times, from the USA, Canada and Europe may also be of interest. I will produce a similar list for Latin America and Asia tomorrow.

These shares reinforce the argument that investors have become more risk averse in the aftermath of the credit crisis and are demanding a more secure cash flow before committing capital. Against this background the continued decline in government bond yields stands out in stark contrast to the returns being demanded elsewhere and it would seem to be only a matter of time before government bond yields find support.