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3 Stocks to Buy as Trump Calls for a Lower US Dollar

3 Stocks to Buy as Trump Calls for a Lower US Dollar
(Dollar Photo Club)

Tuesday, 25 April 2017 07:29 PM Current | Bio | Archive

The rally in the U.S. dollar has gotten so intense, that President Donald Trump has called attention to it. In an interview with The Wall Street Journal on Wednesday, April 12, Trump said:

“I think our dollar is getting too strong, and partially that's my fault because people have confidence in me. But that's hurting—that will hurt ultimately.”

Trump added that he would prefer the Federal Reserve to raise interest rates at a slower pace, so as not to endanger the U.S. economic recovery.

Both statements are generally bearish for the U.S. dollar, and had an immediate impact. In the aftermath of the interview, the U.S. dollar index fell about 0.5% for the day.

If the U.S. dollar continues to fall against the world’s major international currencies, it would widely be a boost for stocks.

Companies that sell a high percentage of their products overseas would see a meaningful windfall from a lower U.S. dollar, such as the following three U.S. stocks.

Weaker Dollar Play #1: Coca-Cola (KO)

Among the stocks that stand to benefit the most from a lower U.S. dollar, are multi-national consumer products companies. These companies generate significant amounts of revenue overseas, and are exposed to consumer spending, which can fluctuate based on currency movements.

One example is Coca-Cola, the largest beverage manufacturer in the world. The company has a market capitalization of $186 billion, and generates more than $40 billion in annual sales. Coca-Cola’s beverages are consumed more than 1.9 billion times each day, across the globe.

Last year, Coca-Cola’s revenue fell 5%. But this was due entirely to unfavorable currency fluctuations. The strong U.S. dollar reduced the company’s sales by 12%, which is a huge impact from foreign exchange. Coca-Cola’s sales would be even stronger, were it not for the strong U.S. dollar.

The reason why companies like Coca-Cola struggle when the U.S. dollar rallies, is because it cuts into revenue. A stronger U.S. dollar makes exports less competitive with locally-produced goods. Moreover, a rising U.S. dollar means revenue generated overseas converts into fewer dollars when it is brought back to the U.S.

This would be a great time for the U.S. dollar’s impressive rally to take a breather for Coca-Cola. The company could badly use a catalyst, since soda consumption has declined in the U.S. each year for more than a decade. Consumers are increasingly consuming less sugary, high-calorie carbonated beverages, which has had an impact on Coca-Cola’s domestic sales.

As a result, a decline in the U.S. dollar would be a welcome reprieve for Coca-Cola. Last year, it actually grew ‘organic’ revenue, which excludes the impact of currency exchange, by 3%. This indicates the company is still seeing rising demand for its products. But Coca-Cola generated more than half of its revenue from outside the U.S. last year.

A weaker U.S. dollar would be a boost to Coca Cola’s revenue and dividend growth. Coca-Cola has increased its dividend for 55 years in a row. This makes it a member of a very exclusive club—the Dividend Kings, a group of just 19 stocks that have 50+ years of annual dividend increases.

To see the complete list of Dividend Kings, click here.

Based on its recent share price, Coca-Cola stock has a 3.4% dividend yield.

For an in-depth look at how well Coca-Cola stock compares with its biggest competitor PepsiCo (PEP), click here.

Weaker Dollar Play #2: Nike (NKE)

Up next is athletic apparel giant Nike. Like Coca-Cola, Nike has a huge international presence—it generated approximately 55% of its total revenue from outside North America, through the first three quarters of its current fiscal year.

Revenue increased 6% over that nine-month period, but excluding changes in currency markets, revenue would have increased 8%.

This trend is particularly evident from Nike’s “futures orders”, a financial metric the company uses as a gauge of future demand.

Reported futures orders, as of last quarter, called for a 5% decline in Western Europe, and a 2% decline in China. But, excluding the impact of foreign exchange, futures orders in Western Europe and China increased 4% and 3%, respectively.

As a result, a lower U.S. dollar would be a major tailwind for Nike in 2017 and beyond.

It would help Nike to continue increasing its dividend by double-digit rates each year. Nike is a high-dividend growth stock. It is a Dividend Achiever, a group of 265 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

Nike’s financial performance is being artificially depressed by foreign exchange, which may lead investors to the conclusion that the company is performing poorly. But this is not the case; Nike remains one of the world’s top brands, with excellent returns on capital.

For example, Nike is the 28th most valuable brand in the world, according to Brandirectory. Nike’s brand is valued at $32 billion, an increase of 13% from last year. Nike generated a return on invested capital of 33% last quarter, which means the company is a very effective allocator of capital.

To see 3 reasons why Nike is a better stock to buy over the long-term than its main competitor Under Armour (UA), click here

Weaker Dollar Play #3: Philip Morris International (PM)

Tobacco giant Philip Morris International has been hammered by the strong U.S. dollar. Unfavorable currency exchange wiped away $1.3 billion in sales from PMI in 2016 alone.

Foreign exchange had a big impact on PMI’s bottom line last year. Overall, PMI’s adjusted earnings-per-share increased 1.4% in 2016, to $4.48. But excluding the impact of the strong U.S. dollar, adjusted earnings-per-share would have increased 11.8% for the year, to $4.94.

This means PMI’s earnings-per-share growth was reduced by more than 10 percentage points, just from currency fluctuations.

Currency could have a significant impact on investor sentiment towards PMI. Earnings-per-share growth appeared weak last year, but the underlying business actually performed well. Despite a 4% decline in cigarette shipments last year, PMI managed strong growth, thanks to cost cuts and new products.

PMI’s shipments of its new HeatSticks product soared from 396 million in 2015, to 7.4 billion last year.

This has helped PMI return to growth in 2017. First-quarter revenue—excluding unfavorable currency and excise taxes—increased 1.7%, year over year.

Investors should still view PMI favorably, since foreign exchange is a purely financial item.

That said, currency still has a tangible effect on companies like PMI, in terms of dividend growth. As PMI’s net revenue and earnings growth stalled, its reduced its dividend growth as well.

For example, its most recent annual dividend increase was just a 2% hike.

Still, PMI has an attractive dividend yield of 3.8%, which is well above the 2% average dividend yield for stocks in the S&P 500.

Because of its high dividend yield, PMI is a stronger dividend stock to buy right now than its tobacco industry peers—even better than legendary dividend stock Altria Group (MO).

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Companies that sell a high percentage of their products overseas would see a meaningful windfall from a lower U.S. dollar, such as the following three U.S. stocks.
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Tuesday, 25 April 2017 07:29 PM
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