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The U.S. dollar has been on a tear all year. The greenback has rallied considerably against most other international currencies, particularly the British pound. The summer Brexit vote cast a great deal of uncertainty over the U.K. economy.
This has resulted in a steep drop in the pound versus the dollar. This has had a similar effect on equities. Stocks based in the U.K. have greatly underperformed the S&P 500, which has gained 13% in the past one year.
By comparison, the following three U.K.-based companies have cheap stocks, and high dividend yields. In a stock market many feel is overpriced, these three U.K. stocks could be attractive buys for value and income.
High-Yield U.K. Stocks: GlaxoSmithKline (NYSE: GSK)
GlaxoSmithKline is a global health care company. The stock declined 14% in the past three months, which has pushed its dividend yield up to 5%.
The most important therapeutic area for the company over the past several years is its respiratory business. But this is a difficult time for GlaxoSmithKline, because its flagship Advair and Avodart medications are facing patent expiration.
This caused sales of Advair to decline 10% last quarter. The good news is that the company is preparing for this with new respiratory products like Breo.
And, GlaxoSmithKline is expanding its pharmaceutical business into attractive new areas like HIV and vaccines. New product sales rose 79% last quarter, and now represent 25% of GlaxoSmithKline’s total pharmaceutical sales.
Separately, vaccine sales increased 20% last quarter.
GlaxoSmithKline has a strong product pipeline which should help restore growth in the face of generic competition. The company has 10 new assets that will start Phase III trials by next year, while 20 will be in Phase II by the end of 2017.
High-Yield U.K. Stocks: BP (NYSE: BP)
BP has an even higher dividend yield than GlaxoSmithKline, of 6.4%. Its dividend yield has risen sharply over the past year, as its share price declined due to the collapse in oil and gas prices.
But unlike many other companies that had to cut or suspend their dividends to stay afloat, BP has not cut its dividend. The main reason for this is because BP is an integrated major. It has a large downstream refining business, in addition to its upstream exploration and production business.
Refining profits tend to rise when oil prices decline, because volatility in oil prices lowers refining feedstock costs and boosts margins. BP’s downstream segment earned $7.5 billion last year.
BP’s upstream business is losing money, but the company could see a meaningful recovery soon. OPEC recently agreed to cut production, which could result in rising oil prices in 2017. Losses are already improving, now that oil prices have climbed back to $50.
Last quarter, BP earned $1.6 billion in profit. This compares with a $1.4 billion loss in the previous quarter.
If oil prices stabilize and keep rising, BP could return to sustainable profit soon. Earnings are also set to improve thanks to BP’s asset sales and cost cuts. BP divested $75 billion of assets since 2010. And, the company cut capital spending by 11% through the first nine months of 2016.
A return to profitability would be critical to helping secure BP’s dividend payment.
High-Yield U.K. Stocks: Unilever (NYSE: UL)
Unilever is a global consumer products giant. It was founded all the way back in 1885.
Unilever’s sales are almost evenly split between food and consumer products. In all, Unilever holds 13 brands that generate at least $1 billion in annual sales. A few of its core brands include Dove, Hellman’s, Lipton, Knorr, and Axe.
In 2015, the company grew revenue by 10%. For the year, earnings increased 14%, due to revenue growth, cost controls, and share repurchases.
The company’s strong brands lead to significant pricing power. Over the first nine months of 2016, revenue increased 4.2%. Price increases accounted for 2.8% revenue growth.
The emerging markets are a key growth driver for the company. Unilever’s emerging market operations increased revenue by 7.2% through the first three quarters.
As a consumer products giant, Unilever enjoys a very stable business model. People always need to eat and use household products, which makes the company resistant to economic downturns. It consistently generates profits from year to year, which it uses to pay dividends to shareholders.
Unilever has an attractive 3.5% dividend yield.
Attractive Buys For Income Investors
Global economic uncertainty has caused international stocks, particularly those based in the U.K., to underperform U.S. stocks throughout 2016.
But this fear is likely overblown. GlaxoSmithKline, BP, and Unilever are huge companies with global businesses. These U.K. stocks generate significant earnings in the U.S. as well as the emerging markets, so they should be able to withstand the Brexit and other geopolitical concerns.
In addition, their dividend yields tower above the 2% average dividend yield in the S&P 500. This makes all three U.K. stocks attractive buys for income investors.
Disclosure: The author is personally long GSK and BP.