Does the Dollar's Demise Affect Dividend Growth?

A quick and simple answer is, no it does not affect dividend growth if dividend investors understand what it really means.

Corporations pay dividends from the combination of profitability, cash flow, income, prudent money management, etc. With the current state of the economy in United States (and other parts of the world), a majority of corporations are facing negative growth. In such a scenario where will dividend growth come from? In this challenging environment, dividend investors need to look at the macro economic scenario and understand how it will play out in long haul over a period of the next 10, 20, or 30.

We read a lot about demise of the US dollar. At a very fundamental level, which country’s currency becomes a global currency will depend upon political maturity and economic stronghold at the global level.

• United States: Every nation in this world wants to do business with the US because of its strength in free market system, strength of its institutions, innovative and entrepreneurial business environment, and open minded consumer base. History shows us that every bust is followed by a boom, albeit of a different economic form or shape or pattern. Looking back 100 years or more, we can see booms and busts in different sectors such as in textiles, then infrastructure, automobiles, space and airline, hardware and software, and finally real estate and financials. The present financial crisis may shrink US GDP by a couple trillion dollars, from $13 trillion, but still it will be the largest economy.

There is definitely some rational logic behind the dollar's demise and I would agree with most of it. However, there isa fundamental flaw in this chain of reasoning. While there is a lot of talk of the demise of the dollar, what about its replacement? Which currency in the world will replace the US dollar? There is also a lot of discussion that emerging markets (particularly BRIC nations) will be the drivers of the global economy. In order for BRIC nations to provide leadership at a global stage, these nations have to demonstrate political maturity and economic foresight to global citizens.

• China has a long way to go in demonstrating trust among its own people first and then among the League of Nations. History suggests that world domination comes only after prosperity of a country's own citizens. A nation cannot dominate beyond its borders with a struggling and constrained population. Its currency, the Yuan, has trust issues among the global nations. Who wants to trade in Yuan?
  
• Brazil is still just potential and needs to show political maturity and independent thought on the world stage.
• India is too diverse, too democratized, and too busy with inconsequential bickering with its neighbors. Its economy is growing but still not in the top five to have any meaningful bargaining power. Its currency, the Indian Rupee, is still searching for an identity and role on the world stage.
• Russia may perhaps have some legacy military strength; however, it is still confused between communism and free market economy. Its currency, the Ruble, is nowhere near being a global currency.
• Japan’s stagnant economy and aging demographics are not able to support the case for the Yen being a global currency.
• The nearest contender is European Euro. Over the last few years it has thrown challenge to the US Dollar’s status. I believe the issue with the Euro is that it represents multiple countries - the bigger economies (e.g. UK, France, Germany, etc) and smaller economies (other European nations). Other than the largely available European market, it does not have any other argument or bargaining strength. Individual countries still continue to use their own currencies and have not shown any inclination to phase it out. I believe the Euro is still in its infancy, in a sense that it still needs to shows its resilience amidst a fragmented political landscape.
  

While on a long term evolutionary basis, 30 or 40 years down the line, one may see the change, I don’t expect to see this within the next 20 years. I would only go so far as saying that for the next 12 to 20 years, BRIC nations will be the catalyst in real global growth and corporate earnings. Here in the US we are facing some headwinds and perhaps may continue to do so in the near future. I cannot predict when this will end.

I can say that in the next 10+ years, there will be quite a large number of US and other multinational corporations that will still stand on their own strengths. There are quite a few corporations that are well positioned to continue their growth in developed markets and emerging economies. Mentioned below is the list of companies that are deriving their revenue (and hence earnings) from all types of economies. Figures in parentheses indicate approximate percentage revenue from emerging markets. Most of these corporations have paid growing dividends in last five years as measured in their native currencies.

• Procter and Gamble (PG) (35%)
• Unilever (UN) (30%)
• Johnson and Johnson (JNJ) (60%)
• Qualcomm Inc. (QCOM) (60%)
• Intel Corporation (INTC) (50%)
• International Business Machines (IBM) (45%)
• Microsoft Corporation (MSFT) (33%)
• ABB (27%)
• The Coca Cola Company (KO) (60%)
• Pepsico Inc. (PEP) (50%)
• Cadbury PLC (CBY) (24%)
• Nestle (NSRGY.PK) (26%)
• Siemens AG (SI) (23%)
• Vodaphone PLC (VOD) (20%)
• Exxon Mobil Corporation (XOM) (60%)

Summary is…

I cannot predict what will happen to the value of the US Dollar and/or future growth from emerging markets. Dividend growth investors have many choices to position themselves to blunt the effect of these issues. Invest in dividend growth companies that have a notable presence in all markets. After that, the discussion of the dollar's demise becomes purely academic in nature.

Full Disclosure: Long on PG, UL, PEP, JNJ, and INTC.

Comments

[ArtfulDodger:]

Good work! Good article. Thank you very much.

Mar 25 08:50 AM

[donzelion:]

"China has a long way to go in demonstrating trust among its own people first and then among the League of Nations."

Once China moves away from "three books accounting" (one book for management, another for auditors, and a third for government), then perhaps they'll start putting together companies with some level of reliability. As is, folks who think AIG or U.S. banks were a little off with their numbers and bonuses would be aghast at practices in many hot Chinese equities.

However, bear in mind that the Euro represents a bigger market than the U.S. If they can keep their currency together during the first serious test.

Still, your conclusion is perfectly sound: "Invest in dividend growth companies that have a notable presence in all markets." Whether Exxon Mobil or BP prospers (both are global), a dividend investor will do fine. The one extension/caveat: if one wishes to diversify with global dividend payers, watch out for unusual taxes (esp. for India) and currency effects that can help or hurt (e.g., Brazil). I like diversifying for the benefits of currency protection (if the dollar is displaced, foreign dividend payers should pay out more).

Mar 25 01:18 PM

[moneypenny:]

great perspective, and you really hit the nail on its head.

Mar 25 02:28 PM

[Living4Divi...:]

Great article! You are absolutely correct. I read that the S&P500 gets appx 44% of it's earnings in non-dollars. So dollar depreciation actually helps earnings.

May 15 12:02 PM

[TIP Guy:]

I am surprised you did not mention any of the indian companies? the most stable among emerging economies

May 24 11:21 PM