A bit of an abbreviated report this month. We are travelling again were in China where even with a VPN, internet access is a bit sporadic and I had to do some fancy manipulating between machines to do any analysis. We are now in Thailand so here is what I have put together so far. I will be back in Canada for next month’s edition, so hopefully more analysis.
Not a great month. All markets were down about 2% for the month. The TSX is up almost 2% for the year while the US markets are flat for the year so far. My portfolio was down just over 1%, but it up over 6% on the year mainly on the strength of the US dollar, rather than the stocks themselves. Excluding the effect of the exchange rate, my Canadian stocks are up about 1% on the year, while my US stocks mirror the market with a slight loss.
Check the comments section for a question I received and my response. I will try to address this more in my next post.
I received the following commentary from Peter in Doha. I like what he has to say.
I was thinking about your recent acknowledgement that you, like many, incurred a slight nominal decline in your investments in March. I use ‘nominal’ because the USD has strengthened so much over the last few months that if you were to sell your American investments and repatriate your funds to Canada, you would likely still have quite the YTD windfall in Canadian dollars. My purpose for mentioning this is to point out what I feel are the hedging benefits of holding investments in foreign currency, particularly American.
To those that are still reading (thank you), I’ve tried looking for research to support my hypothesis and have trouble finding some. It seems the word ‘hedging’ is a loaded term in search engines and I wind up with results that include options and various other pure hedging tools. That’s not what I mean. I’m looking at it from a different angle. I believe when Canadians buy on American markets there’s a different income smoothing that happens, arguable a desirable one. At times when the American dollar is cheap, the American companies repatriate earnings they make in foreign divisions and subsidiaries, and these earnings are amplified by the exchange rates. Hence the cheapness of the American dollar and the attractiveness of potential American stocks is partially offset by their higher earnings and therefore higher values of those target companies.
However, as the American dollar appreciates, the American firms don’t get as much ‘bang for their buck’ when they convert their (still profitable) foreign divisions and subsidiaries earnings back to the American home currency. That contributes to an appearance that these American multinational company’s profits have slipped. Sometimes they have because the exchange rates also impact the underlying costs of doing business, but sometimes it’s not a fundamental change in business costs so much as the currency impact itself. Hence, their reported profits and valuations appear to have slipped more than they really have.
The bottom line for me is that I feel when Canadians hold American investments, we are reducing our exposure to exchange rate volatility. When the American dollar is weak, these look like good buys. But, even when the American dollar increases rapidly like it has recently, and this affects multinational profitability and valuations for fundamental reasons (costs of business) and appearance reasons (conversion rates), hold on. Remember that while your portfolios might not be doing as well as you hoped in nominal terms, the real value of your portfolios probably remain as strong, if not stronger, than ever. Keeping your money in these large, safe, dividend-paying multinationals reduces your exposure to exchange rates and works to stabilize your investments. And, don’t forget, your dividends are worth more now than every. So it’s all good!
Suggested stocks – A++, 2% or greater dividend yield, history of dividend growth
You may notice that COP is no longer on the list. ValuLine has moved it from A++ to A+, still strong, but not in line with my criteria. I will decide soon whether to dispose of my shares or keep claiming the high dividends. Will keep you posted.
|Company||Ticker||Financial Strength||Dividend Yield||Dividend Growth 10-Year|
|Automatic Data Proc.||ADP||A++||2.44||13.50|
|Baxter Int’l Inc.||BAX||A++||3.06||10.00|
|Deere & Co.||DE||A++||2.73||15.50|
|Exxon Mobil Corp.||XOM||A++||3.38||8.50|
|Illinois Tool Works||ITW||A++||2.01||12.00|
|Int’l Business Mach.||IBM||A++||2.86||19.50|
|Johnson & Johnson||JNJ||A++||2.80||11.50|
|Merck & Co.||MRK||A++||3.13||1.50|
|Novartis AG ADR||NVS||A++||2.77||15.50|
|Procter & Gamble||PG||A++||3.14||10.50|
|Public Serv. Enterprise||PEG||A++||3.79||2.50|
|Royal Dutch Shell ‘B’||RDSB||A++||5.81||6.50|
|Unilever PLC ADR||UL||A++||3.56||9.00|