Dividends in strong currencies--a strategy that fits this market
08/09/2011 8:30 am EST
You have to have a degree of long-term optimism to buy growth stocks during the current global market sell off. And maybe you don’t right now what with the continuing euro debt crisis, the downgrade of U.S. debt to AA from AAA by Standard & Poor’s, and stock market reaction in Asia that on Monday morning had a whiff of panic. Quite possibly this doesn’t feel like a time to be buying any of the growth stocks I picked in my Friday, August 5, post on 10 growth stocks for a low/no-growth global economy http://jubakpicks.com/2011/08/05/10-picks-for-a-lowno-growth-global-economy-and-theyre-certainly-cheaper-than-they-were-a-week-ago/
Or maybe you can manage to muster a degree of long-term optimism, but the short-term looks very dark. And you’re not quite sure how long that short-term will last. A few days or a few weeks? Then sitting in cash feels like the right thing to do. Buy some gold? Gold closed in on $1700 an ounce Monday morning on buying in Asia. It’s probably still a good hedge—if the next stop is $2,000 that’s a 17% gain from here. But it’s expensive and carries its own risks of a correction and has the draw back of not paying any yield. Bonds? Certainly not U.S. Treasuries as everyone tries to figure out the ramifications of the U.S. downgrade.
Because I don’t know how long current market conditions might last, over the weekend I found myself thinking about safety certainly but safety that pays a little bit. And that’s led me to think about what I’m calling a safe-currency enhanced dividend play.
For example, I’ve been thinking, a dividend of 3.47% on shares of EI DuPont (DD) looks attractive versus the 2.52% yield on the 10-year U.S. Treasury. Sure, DuPont is rated just A for the long-term by S&P but that A looks a little better today than it looked when the U.S. was AAA just last Friday.
The one thing that troubles me about DuPont, though, is that this U.S.-based but global company does business and pays its dividends in dollars. When it comes to doing business around the world, a weak dollar that promises to get weaker still is a mixed blessing. It certainly gives a U.S. company a pricing edge against competitors who sell in stronger currencies. (I’d hate to be a chemical company selling its goods in Swiss francs right now, for example.) On the other hand, it also raises the cost of raw materials especially those that aren’t priced in dollars. I don’t think you can call a weaker dollar a plus or a minus for all U.S. companies. Which it is and how much depends on a specific company’s mix of business.
But there’s no doubt that all else being equal, I’d prefer if DuPont paid me it’s dividend in something other than dollars. If the dollar continues to weaken, that dollar-denominated dividend stream will be worth a little less each day.
What would I prefer? Not euros or yen certainly. But there are still strong currencies in the world. Swiss francs. Canadian and Australian dollars. The Swedish krona and the Norwegian krone. With each drop in the dollar, or the euro, or the yen the value of dividend streams from companies doing business in these currencies increases to anyone collecting those dividends in a weak-currency country.
That’s not to say that piling into just any strong-currency dividend stock is a no brainer. Remember that a strong currency is a mixed blessing for the company doing business in that currency. A Swedish manufacturer going head to head with a U.S. manufacturer is facing a competitor able to sell its goods for less to many customers every time the dollar falls. At the same time the goods of the Swedish manufacturer get just a little more expensive to many customers every time the krona appreciates. If you want to see the damage that having to compete in a strong currency can do to companies, just take a look at the devastation in Brazil’s goods exporting sector from the strong real.
Again, you need to look at the pluses and minuses of a strong currency on any company. I like Nestle’s (NSRGY) 3.49% yield paid in Swiss francs, for example, but worry about the pressure a strong franc puts on the company’s prices around the world. (The degree to which Nestle produces its products locally mitigates some of the competitive disadvantages of a strong Swiss franc.)
So what would be the characteristics of my ideal strong-currency, dividend stock? Besides the obvious strong-currency bit, of course.
As always with my dividend portfolio I’d like the stock to yield more than the 10-year Treasury (now at 2.52% or so.)
I’d like the company’s business and balance sheet to be safe and solid enough so that I think I’m unlikely to see a cut in dividend anytime soon. And I’d certainly prefer not to give back in a sinking share price what I pick up in dividend yield.
And I’d like a mix of businesses that maximizes the benefits of a strong currency to me the shareholder while minimizing the competitive pain to the company whose shares I hold.
Stocks like this aren’t exactly easy to find, I’ll admit. AmBev (ABV), which I added to the dividend portfolio on May 6, 2011 has a great many of these characteristics (including a 4.34% dividend yield) but I worry that the Brazilian real is overpriced after its huge appreciation against the dollar given the current problems in the Brazilian economy.
Australia’s Westpac Banking (WBK in New York or WBC.AU in Sydney) with it’s 7.34% yield makes the grade, I think, although investors might have to sit tight through some turbulence in the Australian economy as the central bank tries to fine tune interest rates and inflation.
The most attractive combination that I’ve found recently is Svenska Handelsbanken (SVNLF in New York and SHBA.SS in Stockholm). This is the most conservatively run of Sweden’s banks with a history of extremely low loan losses. In July the cost of protecting the bank’s own debt against default in the credit default swaps market was the second lowest in the world among197 banks tracked by Bloomberg. The bank’s Tier One capital ratio is 15% and the bank earns a 15% return on equity. The shares of Sweden’s second largest bank (60% of profits come from the Swedish market) pay a yield of 4.9% and trade at 9.9 times trailing 12-month earnings. I’m adding the stock to my dividend income portfolio today.
And I’m going to keep looking for strong-currency dividend income stocks. I don’t think the decline in the dollar—and the yen and euro—are short-term trends. Adding a bit more exposure to strong-currency dividend flows strikes me as a good long-term strategy for getting a bit more return in a world where decent returns seem very hard to come by.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Westpac Banking as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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