Consider These American Companies for International Diversification
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many financial planners espouse the merits of internationally diversifying your stock holdings. Across the globe, it’s important to not have all your eggs in one geographic basket.
There are hundreds of international stocks to choose from, but with unfamiliar far-away companies, questionable accounting methods, and hard-to-find financial reports, many investors may be frustrated at the difficulties of suitable international diversification.
If you count yourself among them, it’s actually possible to achieve international diversification without ever leaving the shores of the U.S. That’s because many large, entirely familiar companies located in the United States derive a majority of their profits from overseas.
American companies in name only?
Many companies are seen as American corporate giants, yet the fact remains some of them actually do much more business abroad than they do in America.
The reason for this isn’t hard to pinpoint. While there’s no doubt the United States continues to recover from the worst recession in decades, it’s also true that this is an extremely mature economy. Other geographic areas of the world are growing at much faster rates than the U.S., which is why many American companies have greatly focused on emerging markets instead.
In particular, the pervasive belief that the BRIC nations—which include Brazil, Russia, India, and China—will lead global growth over the next several years has led large American companies to focus their efforts on expansion outside the U.S.
For example, Dow Chemical (NYSE: DOW) is seen as an American corporate giant. Yet, the fact is Dow Chemical derived only 36% of its revenues from North America in 2012.
And, Dow continues to emphasize on emerging market growth as a future catalyst. Dow derives a full third of its total revenues from what it calls emerging geographies.
Likewise, athletic apparel giant Nike (NYSE: NKE) still counts North America as its biggest market, but that is rapidly changing. Of the company’s more than $25 billion in fiscal 2013 revenue, Nike derived two-thirds of it from outside North America, and the company’s future optimism is fueled entirely by international growth.
Ditto for integrated energy giant Exxon Mobil (NYSE: XOM), which briefly became the world’s biggest company by market capitalization earlier this year. Exxon is truly a juggernaut, with a $393 billion market value and more than $450 billion in revenue last year alone.
Exxon owes much of its success to its international operations. Exxon earns almost half its profits from outside North America. And, the energy giant maintains operations in 47 countries across the globe and holds 87 billion oil-equivalent barrels in its worldwide resource base.
The strategy appears to be working
These companies believe there simply isn’t enough domestic growth to not reach across the globe for profits. And it’s hard to blame them considering the strong results seen in recent periods.
Dow recently reported strong second-quarter earnings of $0.64 per share, which represented strong 16% growth year-over-year. The chemicals juggernaut generated $4.2 billion in cash flow from operations over the first half of the year, as opposed to $2.8 billion through the first six months of 2012.
And, Dow saw strong outperformance in its emerging market operations. North America grew volumes by just 1% in the second quarter, which stands in stark contrast to 12% volume growth in Latin America and 7% volume growth in Asia-Pacific.
Meanwhile, Nike grew its North American revenues by 12% in the fourth quarter, a respectable performance but one that lagged behind the 16% revenue growth in its emerging market operations.
Going forward, Nike notes that one billion consumers will enter the middle class over the next 10 years, most of whom will be located in the BRIC countries. As a result, the company believes this opportunity to be imperative to its future success.
The same goes for Exxon Mobil. The company notes that between 2010 and 2040, worldwide energy demand is expected to increase 35% as the global population grows. Nowhere is this more pronounced than in the emerging economies, where energy demand is projected to soar 65% by 2040.
This will ensure further profits and dividends that have made owning Exxon so rewarding for so long. Over the past five years, Exxon has distributed $145 billion to its shareholders through share buybacks and dividends. Exxon's current dividend yield of 2.75% compares very favorably to the approximately 2% yield on the S&P 500 Index.
The Foolish conclusion
Making sure you’re not overly concentrated in one geographic area is a key component of diversifying your portfolio. When one national economy falls on hard times, another may be prospering, and if you’ve spread your bets, you’re at less risk of seeing your portfolio crumble.
As a result, if you own shares of these strong American businesses, you may already have achieved international diversification, even though each of these companies are located in the United States and are widely considered to be iconic American brands.
Therefore, the tantalizing growth potential presented by emerging economies means strong profits and dividends from these great companies are sure to keep coming for many years to come.
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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of NKE. 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!