Interactive Investor

Ian Cowie: why Europe’s ‘stodgy’ top stocks are growth and income winners

Our columnist says investors should not ignore European shares, which he argues offer much more diversified sources of returns than equivalent names in the United States.

22nd February 2024 10:58

Ian Cowie from interactive investor

Investors worried we have too much tied up in the continued success of Americas Magnificent Seven technology shares should consider spreading risk and reward with exposure to big blue-chip businesses closer to home. For example, Europes GRANOLA stocks deliver healthy returns and help me build a balanced portfolio. Better still, one of my investment trusts contains substantial exposure to all but two of them.

First, though, what are the ingredients in the GRANOLA recipe for income and growth? They are: GSK (LSE:GSK) - formerly GlaxoSmithKline, Roche Holding AG (SIX:ROG), ASML Holding NV (EURONEXT:ASML), Nestle SA (SIX:NESN), Novo Nordisk A/S ADR (NYSE:NVO), L'Oreal SA (EURONEXT:OR), Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and AstraZeneca (LSE:AZN).

This group is much more diversified than the Magnificent Seven - which, for the avoidance of doubt, perhaps I should explain are Alphabet Inc Class A (NASDAQ:GOOGL) (GOOGL), Amazon.com Inc (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA) - because the GRANOLA stocks include the world's most valuable food company, several healthcare giants, and luxury goods mega-brands  in addition to technology.

Value-seekers may also note that the GRANOLA shares tend to trade at much lower valuations than the Magnificent Seven, largely because Europe has a much smaller pool of investors than America.

It’s only fair to admit that it is a few years since the investment bank Goldman Sachs dreamed up the GRANOLA acronym, possibly hoping to repeat their earlier success with the BRICs monicker for funds and shares offering exposure to Brazil, Russia, India and China. However, as a happy shareholder in the Aero and KitKat chocolate-maker, Nestle, and the pharmaceutical giant famed for its weight-loss wonder drugs Ozempic and Wegovy, Novo Nordisk, whose investment in both those businesses predates Goldman’s marketing wheeze, I know from personal experience that the GRANOLA recipe can dish up decent returns.

That’s why I also invested in Fidelity European Trust Ord (LSE:FEV), paying 353p per share last April. It hasn’t achieved much capital growth since then, trading at 369p at the time of writing, but continues to yield just over 2% dividend income that has risen by an altogether more impressive annual average of 12% over the last five years.

Here and now, FEV’s top 10 holdings are led by Nestle - where, full disclosure, I should report that I paid 65 Swiss francs in March 2014, for shares that cost 100 francs now, yielding 3%. Until it was overtaken by the Magnificent Seven’s stellar performance last year, Nestle was one of my top 10 holdings by value and now ranks 11th.

FEV’s second-biggest holding is NOVO, where I first paid $73 for American depositary receipts (ADRs) that were split in two last September to give an effective starting price of $36.50 for stock that now costs $120. Learning the hard way that the ADRs did not avoid Danish withholding tax, I switched into the underlying shares in June 2021, at Danish krone 509, post-split effectively DK 254, which now cost DK 827 and are my fifth-most valuable holding.

With growth like that, I can live with what little income is left after Nordic tax is deducted from NOVO’s gross 1.1% yield. But that irritation does raise the important practical point that FEV’s 2% yield comes through cleanly, because the shares are listed in London, by contrast with continental withholding taxes, which are effectively impossible to reclaim.

More positively, FEV’s third-biggest holding is ASML, which makes the machines that make the semiconductor chips which go into everything digital. Not far behind in FEV’s top 10 are the GRANOLA shares Roche, L’Oreal and LVMH - respectively pharmaceuticals, cosmetics and Louis Vuitton fashion to Moët Hennessy champagne to cognac giants.

While it doesn’t fit into the acronym, it would be short-sighted to overlook FEV’s substantial stake in the eyewear giant, Essilorluxottica (EURONEXT:EL), which makes nearly a third of the optical lenses on this planet. I paid €96 in March 2019, for shares that cost €189 now and comprise my eighth-most valuable holding.

So, unlike the Magnificent Seven which are all focused on a single sector of a single country, FEV and the GRANOLA recipe give me diversified exposure to several countries - including Denmark, France, Italy and Switzerland - as well as several sectors, mentioned earlier.

Contrary to what some twerps on anti-social media seem to imagine, this DIY investor does not primarily aim to shoot the lights out with short-term explosive gains. Instead, I strive to preserve capital while achieving sustainable growth in income to pay for an enjoyable retirement. FEV and the GRANOLA stocks might seem a little stodgy to some, but I believe they will continue to satisfy my hunger for relatively low-risk returns.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), EssilorLuxottica (EL), Fidelity European (FEV), Microsoft (MSFT), Nestlé (NESN) and Novo-Nordisk (NOVO) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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