The U.S. dollar has risen against other major currencies. In uncertain times, many foreign investors want to hold American dollars. After all, the U.S. remains the world’s largest economy. And as the key reserve currency, the market for dollars is liquid and deep. The high U.S. dollar presents challenges and opportunities for American companies.
One challenge is that earnings in foreign currencies turn into fewer dollars. An American company with significant earnings abroad, such as Key stock paint supplier PPG Industries Inc. (NYSE—PPG) can report lower earnings even if its operations are stable. In the long run, a company’s earnings sets its share price.
A second challenge is that the high dollar also makes American goods less competitive in international markets. This can hurt exports and suck in cheaper imports. A wider trade deficit can also hurt the profitability of American companies.
One opportunity from a high dollar is that it makes acquisitions less costly for American companies. They can expand abroad in a cost-effective manner and outbid foreign competitors when lucrative markets open up.
We expect some companies to disclose the impact of foreign exchange when they report their financial results.
Amazon.com is affordable
In other news, American Key stock Amazon.com Inc. (NASDAQ—AMZN) split its shares 20-for-one. As a result, its share price is now in the hundreds rather than the thousands. This makes the shares more affordable for individual investors. That’s a point in the company’s favour.
Too many high-priced American companies seem interested in only large institutional investors. The institutions can afford to buy high-cost shares. Some individual investors can’t.
Splitting the shares is likely to put them into more investors’ portfolios. This, in turn, is likely to increase Amazon.com’s customer base. Given a choice between two largely-equal companies, shareholders are likely to buy from the one they own. Since investors are usually more affluent than the general population, they’re the kind of customers most companies seek. The online retailer’s customer base should grow more.
We also prefer companies that pay dividends, particularly ‘dividend aristocrats’ that raise their dividends each year. This ensures that shareholders earn something even if the shares fall or stall. In fact, this has happened to a number of companies including Amazon.com. Paying dividends also shows a high regard for individual investors.
Amazon.com remains a buy for long-term share price gains provided that you need no dividends. Without the burden of paying out dividends, the company used its funds to make four acquisitions in the year of 2022, with its most recent being the August 5 takeover of iRobot — a manufacturer and distributor of artificial-intelligence home-cleaning vacuum products.
This is an edited version of an article that was originally published for subscribers in the August 5, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •9/14/22 •