The S&P 500 index constituents have a relatively small combined exposure to the international markets in terms of their total revenues. However, some companies in the index derive a lion's share of their sales from the foreign markets.
For companies domiciled in the United States, a large foreign exposure also means a high susceptibility of earnings to fluctuations in the foreign exchange rates. Usually, when the U.S. dollar is weak relative to the currencies in which sales are denominated, earnings get a lift. The opposite holds true when earnings get suppressed because of the strengthening dollar vis-à-vis the currencies in which sales are denominated.
While the weak dollar has helped boost the earnings of many multinational corporations in recent years, a new trend of the strengthening dollar suggests earnings of the companies with large foreign exposures could receive a blow. This has proven true for the multinational consumer goods giant, Procter & Gamble (PG), for which "foreign-exchange fluctuations knocked 4% off net sales in the past quarter."
As the dollar has already strengthened in the past three months, some 5.7% year-over-year relative to the currencies of its major trading partners, earnings of multinational companies will be adversely affected by this development. Many forex analysts see a continued appeal of the greenback as a safe haven, forecasting the currency's continued appreciation relative to its major counterparts. Especially pronounced appreciation is expected against the euro, which should trim the value of European sales volumes translated in the U.S. currency. Moreover, "currencies from Brazil, Russia and India will probably decline at least 15% by year-end," forex experts caution.
Here is an overview of four major international players whose earnings will be hurt by the strengthening dollar. As all four represent attractive dividend plays, any significant correction in their stock prices will create opportunities to establish long-term positions. These high-quality dividend plays pay a major premium in terms of the yield on comparable assets, which makes them especially attractive.
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Philip Morris International (PM) is a $147 billion company serving the international tobacco market. The company's revenues are fully exposed to foreign market demand and earnings are susceptible to changes in the foreign exchange rates. The company has an especially large exposure to the EU market, at nearly 40% of sales.
Philip Morris' earnings per share (EPS) grew at an average annual rate of 10.7% a year over the past five years. Analysts forecast that EPS will expand at a 9.8% a year for the next five years. The company's outlook is bullish on the revenue growth in the Middle East, Asia, and Africa regions, from which Philip Morris derives a majority of its revenues and profits.
Philip Morris is yielding 3.6% on a payout ratio of 61%. The company's yield is almost two percentage points above the yield on the 10-year Treasury and 140 basis points above the yield on the S&P500 index. The company has exhibited robust dividend growth over the past three years. Its peers Altria (MO), Lorillard (LO), and Reynolds American (RAI) are paying dividend yields of 4.8%, 4.8%, and 5.5%, respectively.
On a forward earnings basis, the company seems to be priced at a slight premium to its peers. The stock is trading at $86 a share, up 9.4% year-to-date. Among fund managers, the stock is popular with David Winters (Wintergreen Advisors portfolio) and Ken Heebner, who significantly cut his stake in the company in the first quarter.
Procter & Gamble is a $164 billion consumer goods giant. The company derives 59% of its total net sales from international market. Especially high is the company's European exposure, at 34% of total sales. The company's EPS grew at an average rate of close to 10% a year over the past half decade. Analysts forecast that EPS will expand at an average rate of 7.6% per year for the next five years.
Procter & Gamble pays a dividend yield of 3.8%, more than two percentages above the yield on the 10-year Treasury and 160 basis points more than the yield on the S&P500 (with lower market volatility). The company has a payout ratio of 50%. Its stock is trading at $59.8 a share, on a forward P/E that is almost on par with that of its peers, on average.
Despite the attractive yield, Morgan Stanley does not consider the recent decline in the price of P&G as a buying opportunity. The investment bank cites as reasons P&G's lack of stock buybacks, higher pension expenses, and negative foreign exchange effects. Still, billionaire Donald Yacktman likes P&G. So does investing legend Warren Buffett.
Merck & Co. (MRK) is a pharmaceutical giant with a total capitalization of $122 billion. International sales represent a 57% share in revenues, with Europe (including Middle East and Africa regions) accounting for 29% of the total. The company's earnings were flat over the past five years.
Analysts predict Merck's EPS will grow at an average rate of 4.7% per year for the next five years. The company's 4.3% dividend yield is 270 basis points above the 10-year Treasury yield and almost two percentages points above the yield on the S&P500.
The company's competitors Pfizer (PFE), Johnson & Johnson (JNJ), and Abbott Laboratories (ABT), boast yields of 3.9%, 3.7%, and 3.3%, respectively. Merck's dividend payout ratio is at 75%. Merck is currently trading at $40.18 a share, up 5% year-to-date and close to its 52-week high. Hedge fund manager Irving Kahn is an investor in the company.
Pfizer is a $170 billion is a U.S.-based multinational pharmaceutical company. International sales accounted for 44% of Pfizer's total revenues in 2011. In the first quarter of 2012, that ratio surged to 59% of revenues. The company has seen its EPS contract at an average annual rate of 6.1% over the past five years. It is expected to grow its EPS at a low average rate of 2.5% per year for the next half decade. EPS growth could accelerate in case Pfizer's Alzheimer drugs, some of which are in late stage trials, prove effective and come on line soon.
At 3.9%, Pfizer's dividend yield is some 230 basis points above the yield on the 10-year Treasury and 170 basis points above the yield on the S&P500 index. Pfizer's competitors Merck & Co. and Johnson & Johnson pay yields of 4.3% and 3.7%, respectively. Pfizer has a dividend payout ratio of 72%. The company cut its dividend in 2009 and 2010, but since 2010, it has raised the dividend by 22%.
As regards its forward valuation, the stock is trading at a major discount relative to its long-term average metric. The stock is currently changing hands at $22.73 a share, up 3.5% from the beginning of the year. Billionaires Ken Fisher, Donald Yacktman, and George Soros own the stock (see George Soros' top stock picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
