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Critical Facts You Need to Know About Preferred Stocks
Have you ever wished for the safety of bonds, but the return potential...
Having the world’s reserve currency has been a pretty good deal for the United States. The buck may no longer be as good as gold, but the dollar is still the currency that foreign central banks prefer to hold as backup. As a result, we’ve been able to run enormous trade and budget deficits because other countries so far haven’t minded holding our dollars and dollar-denominated IOUs instead of swapping them en masse for our real estate, companies, or other assets.
But we’re coming to a time when being the world’s favorite currency may not be such a good thing. A combination of our lukewarm economy being better than the cooler economies of other developed nations and the downright chilly economies of emerging markets, plus the imminence of higher interest rates, is pushing up the value of the dollar against other major currencies. That’s been great for U.S. tourists in Europe, who no longer feel like paupers when paying for a cup of coffee in Paris or Copenhagen, but for many major U.S. companies, which post roughly half their annual sales and earnings from abroad — and which are the nation’s core dividend payers — a strong dollar is very bad news.
Many large U.S. multi-nationals — DuPont (DD ), United Technologies (UTX), Coca-Cola (KO ), McDonald’s (MCD ), Procter & Gamble (PG ) — have seen earnings stall or decline because of the stronger dollar’s effect on the translation of foreign sales and profits into dollar terms. More worrisome than the currency translation effect on earnings, though, is the long-term effect a strong dollar can have on corporate operations.
If the dollar continues to stay strong against foreign currencies, the cost of goods manufactured or produced here becomes too expensive for foreign customers, who must use more of their cheaper euros and krona and other currencies to buy U.S. goods. Such a development would make it harder for a company like Boeing, for example, to compete with Airbus.
A stronger dollar wouldn’t be especially helpful on the energy front either as it would tend to raise the price of oil, which is denominated in dollars, for non-U.S. customers. This could lead Middle East producers to increase output to offset the price hikes, which could spell more trouble for North American frackers, who already are reeling from an oil glut.
Because they are under earnings pressure already, major oil companies may be among the first of the steady dividend payers to cut their quarterly payments to conserve cash. If the dollar continues to strengthen, major consumer goods companies that earn much of their profits from overseas markets also could face a decision about their dividend payments.
Remember that half or more of the earnings of U.S. companies including Microsoft (MSFT ), Procter & Gamble (PG ), Caterpillar (CAT ) and DuPont (DD ) come from abroad. Since the threat of a strengthening dollar will be with us for some time, it would be wise to check out a dividend-paying company’s foreign earning’s share before making any buying decisions.