9/11/08

Holding Multinational Companies? Watch Out For the Rising Dollar

The dollar has rallied sharply since mid July. Technical trader Adam Hewison, over at INO.com, has had a buy signal since June. As I'm writing, the US Dollar Index (DX-Y.NYB) has made a new intra day 52 week high. It's back at levels not seen since September 2007.

The Euro, Pound, and other currencies have of course gone lower. The Yen seems to be the only one holding up.







The recent strength in the US dollar, if it continues, may impact the future earnings of US multinationals deriving a significant portion of their revenues from abroad. Just as the falling dollar has helped earnings in the past, its continuing rise can hurt.

Here is a list of some prominent companies with significant exposure abroad:

Coca Cola (KO): Last quarter, the weak dollar contributed 9 percentage points to the company's revenue growth.

Du Pont (DD): 62% of 2007 sales came from abroad. Last quarter, currency exchange contributed about 5 percentage points to sales growth.

General Electric (GE): 51% of 2007 revenue came from abroad, 54% last quarter. It's estimated that within the next couple of years this will rise to 60%.

McDonald's (MCD): 65% of 2007 revenue came from abroad. The firm's European sales are now higher than US sales.

Pepsi (PEP): 44% of 2007 revenues came from outside North America, as did 35% of the profits.

Pfizer (PFE): 52% of 2007 revenues came from outside the US. The weak dollar contributed 7 percentage points to the drug maker's earnings growth last quarter.

Philip Morris International (PM): All the firm's sales come from outside the US. Until its recent purchase of Canada's Rothmans, it didn't have sales in North America. Eleven percentage points of the cigarette maker's revenue gains were the result of the weak dollar last quarter.

Procter & Gamble (PG): So far this year, foreign revenue accounted for 56%. Last quarter, the falling dollar boosted sales by 6%.

Companies that trade on US exchanges but are incorporated abroad may also be affected by the dollar's rally. For instance, a rise in the dollar against the British Pound can drive Diageo (DEO) shares lower.

Any negative effect on multinational shares is probably temporary. The dollar's rise is not expected to last. Most analysts seem to view it as a bear market rally (this can change, of course, with growth slowing in emerging countries and Europe facing the possibility of a recession). US Unemployment continues to go up (I don't buy the explanation that it's because of the benefit extension--the rate doesn't include people who have run out of benefits and are still looking for work), housing prices continue to fall, and the US is still spending like crazy on Iraq. Deficits continue to rise. There's even a (growing, but still small) possibility that the dollar's reign as the world reserve currency will come to an end.

I've noticed that terminally ill people often seem to get much better shortly before they die. The dollar looks that way.

If you're investing on the US exchanges in a company that has a large portion of its revenues coming from abroad, keep an eye on the US dollar.

Disclosure: At the time of writing, I own GE, PG, and PM. I'm happy that PM has recently raised its dividend by 17.39%.