3 Undervalued UK ADRs Trading On The NYSE

Published Wed, 24 Feb 2016 20:45 CET by TopYields.nl


The London Stock Exchange offers value investors great stocks with strong fundamentals and a sustained dividend growth. However, with the currency exchange rates, it is often expensive for US investors to invest directly in the LSE. Through the ADRs - in this article American Depositary Receipts -, value investors can invest in foreign stocks that trade in the NYSE or the Nasdaq at the lowest cost.
Another thing to consider is whether a stock is over- or undervalued. This means that its market price is higher or lower than its present value. When a stock is overvalued and its market price is higher than its present value, investors should sell the stock as it is already more expensive than its actual value and it is highly unlikely to rise further. When a stock is undervalued and its market price is lower than its present value, investors should buy the stock as it is expected that it will rise further.
There are several methods to assess if a stock is over- or undervalued, the most popular being the Graham Number and the Dividend Discount Model (DDM). However, the Graham Number doesn’t take into consideration the dividend growth or other fundamentals of the company and thereby, it is not effective for mid and large-caps.
In this article we discuss three British ADRs, large caps of different sectors that trade on the NYSE. According to the Dividend Discount Model, all three are undervalued.

British American Tobacco, GlaxoSmithKline and Unilever YoY Stock Performance Graph
British American Tobacco (ADR) (NYSE: BTI) is a London-based tobacco manufacturer and seller that provides cigarettes, cigars, and a range of nicotine products, and electronic cigarettes worldwide. British American Tobacco operates under Benson & Hedges, Craven A., Dunhill, John Player Gold Leaf, Kent, Kool, Lucky Strike, Pall Mall, Peter Stuyvesant, Rothmans, State Express 555, Viceroy and Vogue brand names and sells its products in Europe, Asia-Pacific, the Americas, Africa and the Middle East.

Strong Fundamentals: British American Tobacco is a financially healthy company with strong fundamentals. In its Q3 2015 results, the company’s revenues grew 4.2% YoY without adjusting for currency fluctuation, mainly driven by sustained strong pricing and growth in low price segments. The revenue growth has led to an increase in cigarette market share by 40 basis points in primary growth regions like Australia, France, Indonesia, Japan, Malaysia, Pakistan, Russia, South Korea, Turkey, Ukraine and the UK.

Dividend Growth: British American Tobacco declares an annualized dividend of $3.09, yielding 2.81% at a payout ratio of 50%. Since 2000, the company has been consistently delivering a dividend, reaching a 146.5% dividend growth, or 9.8% annually. Considering a discount rate of 28%, the present value of the stock is $109.92 / (0.28 - 0.10) = $109.92 / 0.18 = $610.67. Since the present value is significantly higher than the market price, the stock is seen as undervalued.
The ADR enables investors to buy British American Tobacco stock at a price that is significantly cheaper than the trading price on the London Stock Exchange (LSE). Through the ADR, value investors can invest in a fundamentally strong company at a lower cost.

GlaxoSmithKline (ADR) (NYSE: GSK) is a Brentford-based developer, manufacturer, and seller of pharmaceutical products, including vaccines, over-the-counter medicines, and health-related consumer products worldwide. GlaxoSmithKline provides pharmaceutical products, consumer healthcare products in wellness, oral health, nutrition, and skin health areas and has collaboration agreements with Université de Sherbrooke and Pfizer; development and R&D collaboration with Propeller Health; R&D collaboration agreement with Valneva SE; and collaboration and license agreement with Idera pharmaceuticals.

Strong Fundamentals: In FY 2015 results, GlaxoSmithKline reported revenues $23.9 billion, down 9.5% YoY from $26.4 billion in FY 2014. On the upside, operating expenses were down 33.3% YoY, operating income was up 52.9% YoY and net income reached $8.4 billion, up 87.2% from 4.5 billion in the same period last year. In spite of the debt-to-equity ratio of 3.0, which is normal for a drug company since the pharmaceutical sector is highly capital-intensive, GlaxoSmithKline is a financially healthy company and a great pick for value investors.

Dividend Growth: GlaxoSmithKline declares an annualized dividend of $2.60, yielding 6.74% at a payout ratio of 54%. The company’s dividend growth since 2000 is 33.5% or 2.2% annually. Considering a discount rate of 25%, the present value of the stock is $39.76 / (0.28 - 0.02) = $39.76 / 0.26 = $152.92. Since the market price is lower than the present value, the stock is considered undervalued.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
British American Tobacco 107.29 99.81 119.91 7.49% -10.52% 102.46 17.65 2.36 1.08 50%
GlaxoSmithKline 38.21 37.24 49.08 2.60% -22.15% 96.22 7.98 3.00 0.84 44%
Unilever 42.39 38.60 46.19 9.82% -8.23% 124.01 22.71 0.64 0.81 69%

Unilever (ADR) (NYSE: UL) is a London-headquartered consumer goods company with a large network in the Americas, Africa, Asia, Australia, Europe and the Middle East. Through its Personal Care, Foods, Refreshment, and Home Care segment, Unilever offers well-established brand names, including Axe, Dove, Lux, Rexona, and Sunsilk, Hellmann’s and Knorr, Ben & Jerry’s, Cif, Comfort, Domestos, Omo, Persil, and Surf, among others.

Strong Fundamentals: Compared to FY 2014, Unilever has reported strong FY 2015 results as follows:

  • Revenues $53.27 billion, up 3.8% YoY from $51.32 billion
  • Operating expenses up 3.2% YoY to $45.76 billion from $44.35 billion
  • Operating Income up 7.7% YoY to $7.52 billion from $6.98 billion
  • Net Income $4.91 billion, up 12.4% YoY from $4.37 billion

Dividend Growth: Since 2000, Unilever dividend growth is 16% or 1.1% annually. Currently, Unilever declares an annualized dividend of $1.32, yielding 3.02% at a payout ratio of 69%. Considering a discount rate of 25%, the present value of Unilever stock is $43.65 / (0.25 - 0.01) = $43.65 / 0.24 = $180.21. Given that the market price is lower than the present value, the stock is viewed as undervalued.


Stock name Dividend Yield
Glaxosmithkline 4.36
British American Tobacco 3.10
Unilever 2.77

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