This post The Dollar Is Crashing: These FOUR Execs Are Laughing… appeared first on Daily Reckoning.
Take a look at the list below…
- David Taylor, CEO of Procter & Gamble
- Jeff Immelt, CEO of General Electric
- André Calantzopoulos, co-CEO of Philip Morris
- Louis C. Camilleri, co-CEO of Philip Morris
What do all four of these multi-millionaire executives have in common?
They’re all smiling as the U.S. Dollar breaks down.
You see, ever since topping in December, the value of the U.S. Dollar has been trading lower. And as this trend picks up momentum, it will send shock waves throughout the global economy.
So why are these four execs celebrating? Let’s talk about what’s happening with the greenback…
The Dollar is moving lower as it becomes clear that the Fed is less likely to aggressively hike rates this year. In Fed announcements and minutes, Janet Yellen has made it clear that the Fed will be very cautious going forward.
Yellen is worried that raising interest rates “too soon” will hurt the modest growth in the U.S. economy. And with so much uncertainty in the market this year, I wouldn’t even be surprised to see the Fed resort to lowering rates in the not-too distant future.
As the market comes to terms with a more cautious Fed, the Dollar is sinking.
The reason is simple. For years the market has been waiting for higher interest rates. And higher interest rates strengthen the U.S. Dollar — after all you’d have to pay more to borrow it.
But the opposite is true with lower interest rates. With rates expected to stay lower for longer the outlook for the Dollar weakens.
You can see the start of the U.S. Dollar’s breakdown in the chart below.
The Dollar is heading downward… and that makes a certain subset of executives giddy.
It’s not because these executives relish the lower value of the dollars in their bank accounts. No, it’s because a weaker U.S. Dollar will boost profits for their respective companies. (And in turn, their executive compensation, their stock options, and their corporate empires will all increase in value.)
Here’s how it works…
Most investors don’t realize that a weak U.S. Dollar actually benefits American companies that do business overseas. But the truth is, a weak Dollar actually does wonders for companies who sell products or services to international customers.
There are two major reasons why a weak U.S. Dollar helps these companies…
First, a weak U.S. Dollar makes American companies more competitive. This is true for companies that sell products around the world, for service companies that have customers in other parts of the world, and for any U.S. business that generates revenue in non-U.S. currencies.
Think about a company that sells aircraft engines to an international customer base.
This company has expenses associated with each engine it produces. For simplicity sake, let’s say that it costs $1 million to produce an engine, and the company targets a $1.2 million selling price. This way the company can turn a profit on each engine it produces.
In December, one euro could be exchanged for $1.04 in U.S. Dollars. So to generate $1.2 million in revenue, our company would need to sell an aircraft engine for roughly 1.15 million euros.
But look what happens when the Dollar breaks down and it costs $1.08 to buy a euro.
Now, to collect $1.2 million in U.S. Dollars, the company only needs to sell each engine for 1.11 million euros. Even with the lower price point, the change in currency rate still gives our company plenty of Dollars to turn a profit.
So as the U.S. Dollar declines in value, American companies can sell products and services for cheaper prices on international markets — and still turn a profit!
This advantage will only get bigger as the Dollar breakdown accelerates.
Now, let’s take a look at the second advantage for a lower U.S. Dollar.
The second advantage comes into play when American companies report quarterly and annual profits.
A global company headquartered in the U.S. will have divisions around the world. And these divisions will generate profits in many different currencies.
But at the end of every reporting period, the company must tabulate its profits from each division and report the value of those profits in U.S. Dollars. (It would be extremely messy if you had to wade through an earnings statement that showed a portion of profits in euros, yen, Canadian Dollars and so forth).
When these profits are reported in U.S. Dollars, the figure goes up if the U.S. Dollar is weaker. That’s because it takes more “weak Dollars” to equal a certain amount of foreign currency.
For American companies that generate profits around the world, a weak U.S. Dollar will actually help boost earnings per share.
And of course, when a company reports earnings that are steadily growing, the company’s stock price is likely to move higher. These companies are also likely to pay higher dividends because their U.S. Dollar profits are steadily increasing.
So while the term “Dollar breakdown” may sound like a catastrophe (and can certainly be damaging to the value of your savings account), a weak Dollar can actually generate big profits for a certain category of American Companies.
Here’s How to Play a Weak U.S. Dollar
The U.S. Dollar is breaking down, so let’s cover the best ways to play it.
Besides playing gold, which we covered earlier this week, I’ve got three great American stocks that you should own today.
Remember the executives that I mentioned at the start of today’s article? The multi-millionaires who are laughing as the Dollar breaks down?
Well these are the executives of the companies you should be buying today.
David Taylor is the CEO of Procter & Gamble (PG). This international company sells consumer staples around the world. I’m talking about the products that people must buy every day. Things like toilet paper, toothpaste and laundry detergent.
Few companies have the international reach that P&G enjoys. And PG has a record of nearly 60 years of steadily increasing dividend payments.
Jeff Immelt is the CEO of General Electric (GE). As an industrial powerhouse, GE has a diversified assortment of products and services it sells to international customers. Investors in GE currently enjoy a 3.2% dividend yield and as profits continue to grow I expect this yield to move higher.
Finally, André Calantzopoulos and Louis C. Camilleri are co-CEOs of Philip Morris International (PM). Historically, this company has been one of the largest international cigarette makers. This makes for a very reliable business, and very reliable profits. More recently, PM has been growing its less harmful e-cigarette and vape business lines. As these products gain popularity, PM will grow international profits, on top of the added tailwind from a weak U.S. Dollar.
All three of these reliable stocks should do very well in a weak Dollar environment. So in addition to protecting your wealth with gold, it’s a great idea to start building exposure to these international blue-chip dividend stocks.
I’ll keep my eye on the U.S. Dollar developments and continue to bring you the best opportunities to play a Dollar breakdown.
Here’s to growing and protecting your wealth!
The post The Dollar Is Crashing: These FOUR Execs Are Laughing… appeared first on Daily Reckoning.
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