Leveraging the Strong US Dollar

US DollarAs I plan my investments for 2015, one factor I have been considering is the gaining strength of US dollar against all currencies. We live in a global economy and a majority of companies rely and have operations & revenue from more than one country. Since all of my investments are in the North American market, I will be looking at how I would be leveraging the strong US dollar in this article.

Leveraging the Strong US Dollar

Trade weighted US Dollar

Credit Suisse expects the bull market to last 5 more years

The US dollar has been on tear since 2011 and analysts indicate that we have five more years of what they see is normally a eight-year cycle (see chart). While forex traders may see obvious moves to be made based on that data, investors such us who follow the dividend growth investing strategy have to put some more thought into what this means for our investments.

A strong (and rising) US dollar can be bad for multinational US companies that report their quarterly and annual financials in US$ terms. Companies such as Coca Cola (KO) or General Electric (GE), which have global operations can see their numbers skewed due to the currency conversion rates. On the other hand, companies that rely solely on the US market and do not have operations (or minimal operations) outside of the US have little to worry about when it comes to conversion rates. Examples include railroad companies such as Union Pacific (UNP), pipelines run by Kinder Morgan (KMI) or REITs such as Realty Income Corp (O) – have most of their revenue denominated in US$.

For international investors such as myself, there’s a silver lining in the rising US$. The investments that I hold by investing in the US equities pay out dividends in US$, which are valued much more than they were a couple of years ago. For e.g., in early 2013, the US$ and Canadian dollar were on par. This meant that I could buy companies such as Archer Daniels Midland (ADM) without taking much of a conversion hit. Since then, the stock value has risen 60%. If I were to sell the stock (which I do not intend to), my return would be the 60% plus the 17% of the US$ appreciation against the CAD$. Even without selling, I am seeing more money in my pocket with the dividends due to the conversion rate changes!

How to Leverage?

It is no doubt that the US equities market is one of the best performing markets in the world today and will be for the foreseeable future. Investing in US equities can provide with investment exposure that can seldom be matched by other markets. However, because of the rising US$, and the lack of finding undervalued companies (except the energy space – where my portfolio is already over invested), it might be worthwhile to explore the idea of international companies with huge operations and revenue in the US. Companies in my portfolio that stand to benefit include: Agrium Inc (AGU) with 77% of revenue from US market, Canadian National Railway (CNR.TO) – with 32% of revenue from US, Magna International (MG.TO) – with 51% of revenue from US market and Thomson Reuters Corp (TRI) with 54% of revenue from the US market. Other Canadian companies that could stand to benefit from the higher US$ include banks with huge US-based operations such as Royal Bank of Canada (RY), Toronto-Dominion Bank (TD) and Bank of Montreal (BMO). I’m certain that there are plenty more companies and I invite you to explore the idea.

What are your thoughts on the strategy? Do you own international equities with large operations and revenue in the US to take advantage of the strong US$? Share your thoughts below.

 Full Disclosure: Long ADM, AGU, CNR.TO, GE, KMI, MG.TO, O, TRI. My full list of holdings is available here.

 Image credit: freedigitalphotos.net/podpad

12 thoughts on “Leveraging the Strong US Dollar

  1. Invest in companies that have good exposure in the US is a great method. If goods are produced in Canada and sold in the states, now the US sale price may be cheaper which could benefit these companies.

    • Tawcan,
      Yes, the falling loonie is good news for exporters. So, not only for materials, but also for manufactured goods. This is one of the reason I decided to increase my stake in Magna last week. Another company that fits this profile is AGU.


  2. Thanks for your idea’s. Realty Income and Kinder Morgan Inc. are both core positions in my portfolio. I don’t worry about the strong dollar. It gives me more income (in €). When the dollar becomes more weak, I can buy more because the stocks are cheaper.

    Grts. DD

    • Thats true, DD. The dividends paid out in US$ are worth more now when you convert either to € or CAD$ or any other currency. Im glad to have loaded up on US equities when CAD$ was on par with US$ a few years ago 🙂

      Thanks for stopping by and the input

  3. Though I find the idea interesting, I don’t think I’ll apply it in my stock selection strategy other than taking note of % of earnings in US$ versus international. I have no sense how currency exchange rates will change, other than what others speculate about it.

    On the other hand, as a way to ensure diversity and avoid having all your eggs in one currency basket, I think its a good approach.


    • FerdiS,
      I hear you that you dont want to pick your overall strategy simply based on this one trend. But its something to keep in mind, esp when you buy global companies, which rely heavily on international revenue. Also, if you are investing in international companies such as Canadian banks or European energy names, the dividends you receive in the coming quarters may not be exactly what you expect because of currency distortions.

      Happy investing

  4. R2R,

    Interesting strategy to take advantage of exchange rates like this. I understand why you are doing it, but as a European I don’t pay particular attention to the value of the US Dollar or its currency cycle.

    When I invest in a company it’s always important to me where the majority of that company’s income is coming from. In general, I prefer an almost 50/50 split between North-America and the EU, with a small part of income coming from developing markets (future growth potential). Having an advantageous exchange rate is nice, but definitely not something I actively look for.

    Also, have you seen what happened to the Swiss Frank versus the Euro and Dollar today? Pretty crazy how everyone was taken by surprise and the exchange rate of the CHF gained 30% at one point.

    Thanks for sharing and I hope you get to enjoy a long period of a strong US Dollar!

    • NMW,
      Its something that I dont pay very close attention too, but something that I am trying to understand more going forward. The currency cycles are interesting and definitely complicate things. Sometimes I think its easy to ignore and let it average out over the years. But I’d first like to understand the implications. You are doing well in focusing between EU and NA with some EM exposure.

      Yes, I saw what happened to the Swiss Frank. Very interesting…..and next two weeks will be even more so – with all eyes on ECB.

      Thanks for stopping by

  5. M says:

    How about investing in UK companies? There’s a good tax agreement between our countries, and there are bargains to be had right now. The UK economy is doing pretty well right now too.

    • M,
      There are a few UK-based companies that Im looking at. Wish they were trading on the TSX instead of buying them on the NYSE using USD. Too many conversions back and forth. Still some great companies that I would like to add to my portfolio though.

      Thanks for the input

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