The United Kingdom’s decision to leave the European Union (EU) last June marked one of the biggest paradigm shifts in the global political economy. It may have also sounded the death knell for the EU, which has long struggled with a crisis of legitimacy. Brexit not only triggered the largest-ever two-day rout in global equities, but it also unleashed a wave of Eurosceptic populism on the region that may eventually lead to the demise of the pan-European project.
In 2018, the EU crisis of legitimacy will arrive on Italian shores as the region’s fourth-largest economy votes in general elections. For many market participants, the threat of a so-called ‘Quitaly’ is growing by the day following the resignation of Prime Minister Matteo Renzi last year.
Renzi resigned from his post after failing to secure a mandate to reform the constitution in a highly-publicized December 4 referendum. The reforms proposed to strip the Senate of power so that any proposed law would only require assent from the lower house of parliament, effectively breaking the country’s gridlocked political system. Italians swiftly rejected the motion with 59% of the electorate voted ‘No’ during the referendum. This means legislative power remains vested in both houses of parliament, unchanged since World War II.
The resounding victory of the ‘No’ camp largely reflected Italians’ growing displeasure with Renzi’s administration. It also left the door wide open to the far-right Five Star Movement to sweep to power in the upcoming election. Five Star has vowed to hold a Brexit-style referendum on the euro, with party leader Beppe Grillo striking a decidedly anti-EU tone in his speeches and blogs. No other major Italian party has expressed support for quitting the euro or parting ways with the EU.
However, political commentators note that even if Five Star secures the next election, Italy’s road to euro exit is still a long one. For starters, there’s little to suggest that Italians are in favor of exiting the region’s currency. In fact, the vast majority continues to support Italy’s membership of the bloc, based on recent polls. If this were to change, it would take more than a referendum to exit the currency zone since foreign treaties cannot be revoked with just a popular vote.
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Three Dividend Stocks to Buy If Italy Remains in the EU
Italy’s continued membership in the EU would be a welcome sign for Brussels. It is also likely to promote stability in the market, which is good for the euro and the following U.S. dividend stocks with heavy exposure to the regional market.
Philip Morris International (PM )
Philip Morris International is a leading tobacco company with broad exposure to European markets. The company derives more than one-third of its revenue from the EU and an additional 28% from Eastern Europe, the Middle East and Africa. With such broad exposure to regions where the euro is prevalent, PM stands to benefit from Italy’s continued membership of both the EU and the common currency. PM currently boasts a dividend yield of 3.86%, which is double the consumer goods average.
McDonald’s Corp (MCD )
The iconic fast-food chain has carved out a strong global presence, with roughly 40% of its revenue coming from Europe. In FY 2014, this amounted to more than $11 billion in revenues, up nearly 16% over a four-year period. McDonald’s has a dividend yield of 2.92% and a payout ratio of 60.9%. It has been a consistent dividend grower for 40 years. Find out the complete dividend history of MCD here.
Mondelez International Inc. (MDLZ )
One of the world’s largest snacks companies enjoyed a net revenue of approximately $30 billion in 2015. Europe was the company’s largest segment, accounting for about one-third of total sales. Eastern Europe, Middle East and Africa (EEMEA) accounted for an additional 10% of company-wide sales. MDLZ derived more than one-half of its fiscal 2013 revenue from Europe. It is considered an average dividend grower, having achieved an annualized payout of 76 cents in the most recent quarter.
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Three Dividend Stocks to Buy if Italy Leaves the EU
Although many signs point to Italy remaining part of the EU, continued membership of the bloc is not a foregone conclusion. Italy’s exit from the single market, should it materialize, will have devastating consequences on the euro. Below are three U.S. companies that are heavily exposed to the dollar and would therefore be considered sound investments in the event of a Quitaly scenario.
Lockheed Martin Corp (LMT )
The world’s largest defense contractor has a tight-knit relationship with the U.S. government. In 2015, it generated practically all of its revenues from Washington D.C. as well as international customers contracted through the U.S. government. The company reported net sales of $46.1 billion in 2015 and is a solid dividend grower with a yield of 2.74% and a payout ratio of 57.8%. LMT is a solid pick for investors looking to hedge against euro-related risks.
Walgreens Boots Alliance Inc. (WBA )
The pharmacy-led holding company commonly known as Walgreens generates all of its retail pharmacy revenues in the U.S. Net sales and net earnings have risen gradually in recent years, while international retail acquisitions have also increased. While only a modest dividend grower by industry average, WBA has paid out profits each year since 1976. This makes it a solid choice should Italy shock the market by leaving the E.U.
UnitedHealth Group Inc. (UNH )
Although UNH operates a global arm, the company generates the vast majority of its nearly $160 billion annual revenue from the U.S. The Dow Jones blue chip and nation’s largest insurer saw its revenues surge by 20% in 2015. The company increased its dividend by 33% in the same year. UNH’s Employer & Individual, Medicare & Retirement and Community & State segments are heavily exposed to the U.S. market, making the stock a safe bet against international volatility.
Investors may also be interested in tracking foreign stocks leading up to the Italian election. Keep tabs on all foreign dividend stocks on our dedicated page, which tracks ADRs listed on Wall Street. You can monitor the latest dividend yield, ex-dividend date and pay date of all the stocks listed on the page. By going Premium with Dividend.com, you can also analyze stock picks using our proprietary DARS rating system.
The Bottom Line
Dividend stocks aren’t the only assets that will be impacted by the Quitaly threat. Exchange-traded funds (ETFs) will be highly sensitive to political developments in Europe’s fourth-largest economy. To learn how to play the Italy EU exit from an ETF perspective, check out our sister website’s Quitaly superpage.
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