* Share rally in domestically focused UK companies to fade
* Global companies offer better value after missing out on
* Resources stocks expected to get dividend boost
By Atul Prakash
LONDON, April 11 A year-long outperformance by
domestically focused British stocks is likely to evaporate this
year as investors switch to cheaper shares with more
Shares in some companies that get most of their revenues in
the domestic market have gained anywhere from 30 to 60 percent
in the past 12 months. By comparison, the FTSE 100 index
overall is only up about 5 percent.
Consequently, a basket of about 70 domestically focused UK
companies now trade at 19 times 12-month forward earnings,
against a 10-year average of 14 times earnings, according to
Thomson Reuters Datastream.
Capita is trading at 17 times forward earnings, for
example, compared with a long-term average of 15 times earnings.
Marks & Spencer is at 13.2 times 12-month forward
earnings; its long-term average is 11.5 times earnings. link.reuters.com/dux28v
"The UK domestic trade, which is focused on ways to exploit
the UK consumption angle, has travelled a long way and the
valuation support for the strategy has diminished," said Ian
Richards, global head of equities strategy at Exane BNP Paribas.
"We feel investors now need to employ alternative strategies."
Analysts said that investors who want to keep their money in
London-listed stocks should switch to internationally focused
companies. Overlooked during the domestic rally, they are now
cheaper and offer higher dividend yield, which compares the size
of the most recent payout with the share price.
Among them are defence contractor BAE Systems, food
ingredients firm Tate & Lyle and mobile operator
Vodafone, which generate 80 to 99 percent of their
revenues outside Britain. They offer dividend yields of 4.1 to
5.0 percent compared with 3.6 percent for the FTSE 100.
"A broader search for value has been prompting investors to
look at some internationally focused companies having better
valuations and dividend yields compared to the domestic ones,"
said Keith Bowman, an equity analyst at Hargreaves Lansdown.
Resource companies are one internationally exposed sector
with attractive valuations and potentially higher yields. With
demand for commodities weakening, shareholders are pressuring
them to cut back on capital spending and focus on returning cash
to investors, analysts said.
Such companies include BP, which gets about 34
percent of its revenue from the United States. It raised its
dividend by 5.6 percent after trimming capital spending plans.
Royal Dutch Shell has promised to lower its spending as
well. Each had spent an amount equal to about a third of its
market capitalisation in 2013.
"Energy and materials are value opportunities. We do need a
catalyst, but we believe we have one, with companies in the
sectors starting to focus on better free cash flow and improving
returns to shareholders," said Robert Parkes, an equity
strategist at HSBC Securities.
"Domestically focused UK companies have had a strong run
alongside the improving UK growth numbers. We expect the pace of
gains to moderate going forward."
(Graphics by Vikram Subhedar; Editing by Larry King)