Back in late March the head of US equity strategy for Deutsche Bank, David Bianco, stated that, “I’d welcome a stronger dollar… It contains the risk of any surge in interest rates, or inflation risk.’’ The statement was in reference to predictions by Deutsche Bank analysts that the dollar would strengthen by as much as 7% against the euro by the year’s end.
Coming back to the current month of July, the dollar has indeed strengthened, after climbing by over 6% year-to-date, making it the best performer of the 10 developed-nation currencies tracked by Bloomberg‘s Correlation-Weighted Indexes.
When currencies fall against a stronger dollar, it can cause larger losses in overseas holdings and negatively impact stocks that are heavily concentrated in places such as emerging markets. This trend may continue for some time as well, especially since the Federal Reserve is seriously considering a scaling-back of QE.
So, how to invest?
Domestics like strong dollars….
Companies that do all of their business (or at least a vast majority of it) in the United States will likely benefit from a strong dollar. Utilities and telecommunication companies come to mind when thinking of geographically-pure U.S. plays. One such company that looks fairly valued now is AT&T Inc. (NYSE:T).
AT&T Inc. (NYSE:T) is almost exclusively concentrated in the United States and has pulled back a little over the last three months:
This should provide a nice entry point for the stock, as shares currently yield over 5%. The company is also looking to put the past (filled with earnings destroying one-time charges relating to pension problems and hurricane damages) behind them and move back towards more normalized earnings– sporting a forward P/E ratio of only around 13.
The company is also currently rolling out its 4G LTE next generation technology, which should provide renewed, recurring earnings growth once completed, as the company won’t need to spend as much time and money on highly capital intensive projects and can reap in the benefits from their investment.
Another domestic company that currently looks attractively valued is Altria Group Inc (NYSE:MO). Like AT&T Inc. (NYSE:T), Altria Group Inc (NYSE:MO) also pays a dividend that yields around 5%. The company owns the iconic Marlboro brand and is trading at 16 times earnings, which equates to fair value. The company looks cheaper going forward, however, trading at around 14 times next year’s earnings.
Altria operates in a declining market, as smoking rates have fallen in the United States over the years, but this saturated, declining market still provides massive profits. Altria Group Inc (NYSE:MO) is a cash cow, and with their market share continuing to increase slightly, they now own almost 50% of the market for cigarettes.
While a decline in smoking rates in the U.S. seems troubling at first, it also increases the barriers of entry, which further solidifies this tobacco king’s moat. The company continues to generate massive free cash flow:
Altria is also a reliable provider of income, boosting its dividend payment every year for over 25 consecutive years. For these reasons, it makes a great play on the U.S.
Wait, wait, wait… but what if the dollar loses steam and reverses?
What if the dollar reverses and starts to weaken? Well, look no further than the tobacco company that was spun-off from Altria, Philip Morris International Inc. (NYSE:PM). Philip Morris International Inc. (NYSE:PM) sells many of the same brands as Altria Group Inc (NYSE:MO), including Marlboro, with the only difference being its markets.