S&P Europe 350 Dividend Aristocrats
Comment of the Day

March 08 2013

Commentary by Eoin Treacy

S&P Europe 350 Dividend Aristocrats

Eoin Treacy's view Following yesterday's review of the S&P500 Dividend Aristocrats I thought a review of the constituents of the S&P Europe 350 Dividend Aristocrat Index might be illuminating. The most important difference between the two is the number of consecutive years a company has to raise dividends for in order to gain membership. In the USA this is 25 consecutive years while in Europe it is 10.

The constituents of the European index must also have a float-adjusted market capitalization of at least $3 billion and have an average daily traded volume of at least $5 million. These conditions contribute to considerably more movement in the constituents of European Index than the equivalent US version.

I last posted a pdf of the UK listed constituents in Comment of the Day on October 17th. Former constituents of the Index which often still pay impressive dividends were last reviewed on October 25th .

Since then, BG Group (1.51% in Oil & Gas), Whitbread (2.28% in Hotels & Restaurants) and Weir Group (1.75% in Flow Control Equipment) have been added while AstraZeneca and Sanofi among Pharmaceuticals, BAE Systems from Defence, RSA from the Insurance sector, Atlantia Spa from the Toll Roads Sector and KPN from Telecoms have all been dropped.

The S&P Europe 350 Dividend Aristocrats has underperformed the S&P 500 Dividend Aristocrats Index on both a nominal price and total return basis despite the fact that it has a higher yield. The Index had become quite overextended relative to the 200-day MA when it hit a new all-time high in July and spent much of the rest of the year consolidating. It found support in the region of the MA from November and reasserted the medium-term uptrend last week. A sustained move below 200 is the minimum required to question potential for additional upside.

Europe's economic difficulties have taken a toll on the ability of companies to sustain dividends. Of the 43 constituents 26 are listed in the UK. Only 11 are listed in the Eurozone and most of those are listed in France.

A considerable number of constituents have been trending higher for a number of years and are becoming increasingly overextended relative to their trend means. Associated British Foods and Intertek Group (quality control) are representative of this group. If there is one natural law in the financial markets it is that when something becomes wildly overextended relative to its trend mean, the situation is unsustainable beyond the short-term. Breaks in short-term progressions of higher reaction lows would confirm peaks of medium-term significance. However, until that occurs, the benefit of the doubt can be given to the upside.

As with yesterday's review I would rather focus on those shares that show long-term base formation completion characteristics.

In the Commercial Services sector Capita Group (Human Resources) ranged mostly above the 2000 peak from 2008 until early February when it broke upwards. A sustained move below 750p would be required to question upside potential. Serco (consultancy/outsourcing) surged to test its 2008 peak earlier this week and will probably consolidate but a sustained move below 550p would be required to question medium-term potential for additional upside. Sage Group (payroll & accounting software) has held a progression of higher major reaction lows since 2009 and continues to hit new 12-year highs. While somewhat overbought in the very short-term, a sustained move below the 200-day MA, currently near 290p would be required to begin to question medium-term scope for continued upside.

In the Utilities sector, Centrica (mostly gas distribution) hit a new 5-year high in February and the benefit of the doubt can be given to the upside provided it holds its progression of higher reaction lows, currently near 340p.

In the Defence sector Cobham has encountered resistance in the region of 240p on a number of occasions since 2009 and will need to sustain a move above 250p to confirm a return to medium-term demand dominance.

In the Retail sector, Colruyt (discount supermarkets) has rallied to retest the €38 area and a sustained move above that level would bolster the medium-term bullish outlook.

In the Food sector, Danone beat earnings expectations in late February and has since rallied to post a new recovery high. A sustained move below €50 would be required to question medium-term scope for additional upside. Nestle completed a five-year consolidation in June last year and continues to extend its medium-term uptrend.

In the Cosmetics sector L'Oreal completed a 12-year base in November and continues to extend its breakout.

In the Pharmaceuticals sector, GlaxoSmithKline is retesting the 1500p level and a sustained move above it would reaffirm medium-term demand dominance. Novartis is rallying towards the upper side of a 15-year range. Novozymes completed a 30-month range in February and continues to extend the breakout.

In the Energy sector, Royal Dutch Shell is prone to volatility but has been consolidating mostly above its decade long base since 2010. A break in the medium-term progression of higher reaction lows would be required to question medium-term potential for continued higher to lateral ranging. Weir Group surged out of an 18-month consolidation in February and a sustained move below 2000p would be required to question medium-term upside potential.

In the Chemicals sector, Johnson Matthey has been ranging, with an upward bias, above its previous peak for more than a year. A sustained move below 2000p would be required to question medium-term potential for a successful breakout.

In the Telecoms sector, Vodafone is rallying from the lower side of a two-year range but a sustained move above 200p would be required to confirm a return to medium-term demand dominance.

In the Tobacco sector, British American Tobacco hit a peak near 3500p in July and spent much of the next six months consolidating. It broke out to new highs this week and a sustained move below 3250p would be required to question medium-term upside potential.

In conclusion, there is the world of difference between an overbought condition following a breakout from a lengthy range and an overbought condition following an already well developed uptrend. We have long defined ranges at The Chart Seminar as explosions waiting to happen. Therefore we anticipate powerful breakouts from well-defined trading ranges. Since trading is often relatively condensed inside the range, a breakout will very quickly look overextended but can be given the benefit of the doubt until it stops posting a progression of higher reaction lows. In the case of something that is overbought following an already well developed bull run, the risk of a sharp pullback is more acute because bullish participation is higher and more leverage has been employed.

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