A Strong Dollar Shouldn't Scare You Away From These Stocks
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You may have read in the news lately about the US dollar being "strong." When the US dollar is strong, it has favorable exchange rates on foreign currencies. We will examine how the rising value of the dollar has impacted certain stocks, resulting in some possible buying opportunities.
Some companies are based in the United States, but do a lot of international business. When it comes time to submit earnings reports, the revenues are converted into US dollars. If the dollar is strong compared to that converted currency, the dollar value of the earnings will be weakened.
These weakened earnings do not necessarily mean the business is performing poorly. It is an accounting item. If you can look through the currency exchanges, and to the quality of the company's operating activities - you may find opportunity.
A weak Yen, a strong company
Aflac (NYSE: AFL) is an insurance company that operates in the United States and Japan. While it is the number one provider of supplemental insurance in the US, 80% of its profits actually come from Japan.
Source: Yahoo Finance
As you can see in the chart above, the Japanese Yen has weakened tremendously against the dollar over the last year.
In the first quarter, Aflac earned $1.69 in operating income per share compared to $1.74 per share last year. A loss right? Well actually, no. If you account for the unfavorable exchange rate of the Yen, earnings actually grew 5.7% from the first quarter last year.
Currency headwinds are expected to remain for at least the remainder of the year. This headwind doesn't reflect the business model of Aflac, and thus is giving you a nice price to consider.
For a P/E of about 9.6, you are getting a company that has a:
- Debt to equity ratio of 0.3
- 5 year sales growth rate of 10.50%
- 5 year dividend growth rate of 10.87%
Aflac could prove to be a stock that gives market beating returns when the Yen starts to gain its footing back.
Don't let the strong dollar keep you away from this stalwart
Philip Morris International (NYSE: PM) is an American cigarette company most famously known for its Marlboro brand. But while Altria sells Marlboro in the United States, Philip Morris conducts 100% of its business internationally.
The graph below shows the DXY index. It tracks the dollar against a conglomerate of foreign currencies.
The dollar's strength has been creeping up over approximately the last 2 years. Philip Morris International recently announced its second quarter earnings results.
Diluted earnings per share checked in at $1.30 per share, down from last year's $1.36 mark. Again, if you adjust for unfavorable currency exchange rates, Philip Morris actually gained a penny per share. Thanks to the impression of lack luster earnings, Philip Morris has gone on a $1.50 per share stock price skid since earnings day.
Should you run away from this stock? I don't think so. Even with a not-so-great quarter, Philip Morris still has tremendous growth prospects. If you adjust for currency rates, Philip Morris is still on track with its earnings growth rate targets set by management.
It's in the midst of a 3 year $18 billion share buyback program. This will also aid earnings per share growth. Management has also affirmed optimism that operating results will be stronger in the second half of the year.
You can enjoy this company, even if it's not enjoying the dollar
Coca-Cola (NYSE: KO) is an American beverage company, most famous for its name brand Coca-Cola. It produces and sells its beverages across the globe. Let's again refer to the dollar index illustration from earlier:
While Coke is at home in the United States, it generates most if its revenue overseas due to the massive global market it serves. The stronger dollar has resulted in unfavorable exchange rates. It has also resulted in its products being more expensive to the foreign consumer.
When Coke announced its earnings for the second quarter, management stated that the dollar took a chunk out of the bottom line. Coke took a 2% hit on net income, and 3% hit on operating income due to currency issues.
While Coca-Cola's quarter wasn't spectacular, you still can have faith in this Warren Buffett favorite. It's 5-year sales growth rate is still 10.72%, and its dividend 5-year growth rate is 8.45%. It has maintained a high return on equity at 26.68%.
Moving forward, Coke will weather the strong dollar, and unfavorable economic environment overseas. Even with the lack luster quarter, its global sales were up 1%. Coke has an iconic brand, industry leading distribution and will continue to prosper over the long term. I would take advantage of any hit from these temporary set backs, as Coca-Cola rarely goes "on sale."
The bottom line
These three companies are all strong dividend growth stocks. The strong dollar has hit them a little harder than most companies. However, remember that currency headwinds don't reflect poor health of a company's business model. If the business is healthy, you can feel safe investing for the long term.
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Justin Pope owns shares of Philip Morris International. The Motley Fool recommends Aflac and Coca-Cola. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!