As 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
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.
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