Jubak's Journal
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• Protect yourself from the dollar's decline, 11/9/2004
• 5 energy plays for a long-term oil rally, 11/5/2004
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5 ways to play the dollar's decline
Experts believe the dollar has entered a prolonged period of weakness. But that'll benefit some overseas companies, especially those that do little business in the United States.
By Jim Jubak
No need to panic about the dollar. Its decline looks orderly so far. The European and Japanese central banks have been in full throat, knocking down their currencies and defending the dollar. The U.S. currency even is likely to rally in the near term on prospects for interest rate increases by the Federal Reserve later today, and, possibly, in December.
But its no time to get complacent either. The dollar looks like its in for a long patch of weakness. The problem, of course, is the huge dual U.S. deficits in the federal budget and the countrys trade accounts. The only solution, the currency markets are convinced, is for the dollar to sink so that 1) U.S. exports rise as U.S. goods and services get cheaper for buyers who makes their purchases in yen, euros or loonies, and 2) U.S. imports fall as the declining value of the dollar makes foreign goods and services more expensive for U.S. consumers and businesses.
Its that logic that pushed the U.S. currency to an all-time low against the euro on Nov. 5. And the euro isnt the only currency rising against a falling dollar. The Australian dollar hit a six-month high against the dollar before taking a breather. The Japanese yen is still a tad under the levels it hit at the end of October, but it too is edging toward the highs set last April. You have to go back 12 years to find the loonie, the Canadian dollar, trading at anything like its current high of 83 cents.
Most currency traders believe that the yen, Australian dollar, Canadian dollar and euro, among other currencies, will continue to climb against the dollar even though they have already appreciated in the last 12 months by 5%, 7%, 10% and 13%, respectively.
More expensive imports
That kind of depreciation in the value of the U.S. dollar will hit anybody living on investment income especially hard. A 4% dividend, as long as its paid in U.S. dollars, wont buy as many grapes from Chile, shoes from Spain or childrens books from Singapore. All those imports will get more expensive as the dollar falls.
But income investors can help themselves by putting part of the dollar decline on their side. If the dollar falls, dividends paid in euros, Canadian dollars or Mexican pesos will translate into a larger number of U.S. dollars. And if the dividends paid by companies that do business in those currencies are worth more to U.S. income investors, the stocks of those companies might rise, adding to the total return investors might reap from these stocks.
A couple of caveats. Tax treatment of foreign dividends can get tricky, so talk to your accountant about what kind of account is the best place to hold these stocks. And a falling dollar cuts two ways for foreign companies. Besides increasing the value of dividends that are translated back into dollars, it also reduces the value of any sales denominated in dollars when theyre translated back into the home currency. Ideally youd like to find a company that hedges its U.S. dollar exposure or that does the bulk of its sales in non-dollar currencies.
In my Wednesday appearance on CNBCs "Morning Call" I recommended three blue-chip companies that each have a dividend yield of better than 3% -- in something other than U.S. dollars.
Irish luck
Allied Irish Bank (AIB, news, msgs) has been expanding its asset based in the United States through its ownership of a 23% stake in M&T Bank (MTB, news, msgs). But the bulk of the banks assets remain euro denominated. Its Irish home market accounts for 68% of assets. Poland, one of the newest and fasted growing of the euro-zone economies, accounts for another 7% of assets.
In the year's first half, loans grew by 14% from the end of 2003 and deposits climbed by 5%. Credit quality looks solid with non-performing loans falling to 1.3% of all loans outstanding in June, down from 1.4% at the end of 2003. The shares carry a dividend yield of 3.7%.
Strong roots in Asia
HSBC (HBC, news, msgs) does business through 9,500 offices in 79 countries, but this global bank still has the bulk of its assets in Europe (42%) and derives the biggest piece of its pre-tax profits (31%) from that continent. Though the bank has more exposure to the U.S. dollar than Id like, thats more than balanced by the bank's strength in Asia thanks to its historic roots in Hong Kong. Its initials derive from the banks earlier name: Hong Kong Shanghai Bank. The bank has almost 30% of its asset base in Asia and gets 40% of its pretax profit from the region.
With many Asian currencies pegged to the dollar, the bank's regional exposure there doesnt give investors much currency pop. But it does promise higher-than-average growth as rising incomes in the region increase the demand for banking services. Revenue for HSBC is projected to grow by about 20% this year. The shares carry a dividend yield of 3.6%.
Our friends to the north
Bank of Montreal (BMO, news, msgs) does business in Canadian dollars instead of euros but over the last year the loonie has been up almost as much (10%) against the dollar as the euro (13%). (The Bank of Montreal does do business in the United States through its Harris Bankcorp and BMO Nesbitt Burns subsidiaries.)
Net income jumped last year by almost 30% as the return on assets climbed above long-term averages. Earnings per share in the third quarter climbed by 33% from a year earlier. The shares trade at just 11 times trailing earnings and have a dividend yield of 3%.
And, of course, as always, here are two more exclusive picks for CNBC.com on MSN readers.
In my first three picks I focused on banks since they dont face competition in their home markets from imports made cheaper by a falling dollar and because they can get their capital from just about anywhere in the world to take advantage of differences in exchange rates.
Finding industrial or manufacturing stocks with solid dividend yields, stock appreciation potential and limited currency risk is trickier than finding those combinations in the financial sector. Companies that make things can see their sales take a hit if a falling dollar makes products from U. S. competitors cheaper. But here are two suggestions:
An electric opportunity
Endesa (ELE, news, msgs) is a stock I mentioned in my CNBC column last week as a way to profit from overseas stock markets beating U.S. equities. But its worth mentioning again here as a strong-euro/weak-dollar income play.
The company is the largest electric utility (measured by generating capacity) in Spain, but thats only one of Endesas growth markets. In the year's first five months, power generation grew by 14% in Spain, but it grew even faster in Endesas other key markets: by 27% in Italy and 25% in Latin America. The stock trades at 13 times trailing earnings. Endesa carries a dividend yield of 3.4%.
A dominant position
Companhia Vale Do Rio Doce (RIO, news, msgs) is a more complicated currency play than any of the other recommendations Ive made here. Latin American currencies like the real in this companys Brazilian home market are very sensitive to the direction of the U.S. dollar. The real is likely to weaken if the Federal Reserve raises interest rates. Thats likely to give this iron ore producer a currency advantage over competitors in strong currency countries such as Australia. And it could lead to higher revenues in stronger currencies while the companys costs continue to be priced in the weaker home currency. At worst, if that currency play doesnt work out, youll be stuck with shares of one of the dominant iron ore producers.
Wall Street estimates that earnings per share will grow by 32% in the 2005. The stock yields 4%.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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