SHAHRZAD ELGHANAYAN
With the Canadian dollar up more than 20 per cent against the U.S. dollar during the past 12 months, it's tempting for Canadian investors to increase their exposure to U.S. assets. The currency gain means U.S. assets are now priced at least 20 per cent cheaper for Canadian investors.
But what U.S. asset class is worth investing in? One recommendation is U.S. multinational companies.
"If you are going to own U.S. investments, own what they sell to the rest of the world," advises John Zechner, chairman and chief investment officer of money manager J. Zechner & Associates Inc. in Toronto. "Except for Europe and Japan, we expect most of the world's economies will grow at a faster rate than the U.S. over the next 10 to 20 years and that these economies will want to buy U.S. branded goods."
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So, which U.S. multinational companies are worth looking at? Here are three candidates.
Johnson & Johnson Paul Harris, a partner in Toronto-based Avenue Investment Management, likes health-care conglomerate Johnson & Johnson Half its sales come from outside the U.S.
Canada doesn't have much in the way of a publicly traded health-care sector, so shares in Johnson & Johnson can provide important diversification to a Canadian portfolio. He also believes the stock's expected rate of return is high enough to offset the currency risk (three per cent of this expected return will come from the dividend yield).
Johnson & Johnson is diversified over three main business lines: pharmaceuticals, medical devices, and consumer health care. "Unlike other pharmaceutical companies, it's not as dependent on finding blockbuster drugs or making acquisitions to maintain growth," notes Mr. Harris. "It's an incredibly defensive stock that held up very well during 2008 and 2009. There is great stability in earnings and price."
"Johnson & Johnson trades at 14 times this year's earnings and the S&P 500 trades at 18 times this year's earnings. Given its stability and consistency of earnings, one would argue the company should trade at a premium, or at least in line."
Microsoft Corp. "I would choose Microsoft if I had to go with just one name," says Mr. Zechner. Microsoft sells on a global basis like other U.S. multinational companies and has broad exposure to the fastest growing economies in the world.
"On top of that, they have done a good job of branding the Microsoft/Windows names such that they are recognizable everywhere," he adds.
"The fundamentals of the company are exceptional. They have about $20-billion (U.S.) in net liquid assets and a similar amount in annual cash flow - of which they pay out about $5-billion in dividends," he said.
"The Windows 7 software release is getting a good initial response and should lead to further sales gains and momentum. Also, the Yahoo! joint venture is helping with their online activities, as well as the rollout of Bing, [its new search engine]"
United Technologies Corp. United Technologies is a diversified aerospace and industrial products company with 60 per cent of its sales outside of the U.S. The company is "well-positioned to benefit from improving cyclical demand from developed economies as well as secular demand growth from developing countries," reasons Christine Poole, a managing director at GlobeInvest Capital Management Inc. in Toronto.
"Specifically, the urbanization of emerging countries and investment in infrastructure will benefit the Carrier and Otis divisions," Ms. Poole continues. Its Carrier division is the world's largest maker of heating, ventilation and air-conditioning and refrigeration systems while its Otis division is the world's largest maker of elevator and escalators.
Led by chairman and chief executive officer, Louis Chenevert, the company's management has "deep bench strength and is focused on margin improvements through maximizing manufacturing efficiencies and cost controls. Restructuring programs are expensed as incurred, adding to overall earnings quality," she said. The dividend, yielding 2.2 per cent, has a good record of annual increases and is supported by a modest payout ratio.
"The strong balance sheet and consistent free-cash flow positions the company to execute on opportunistic and strategic acquisitions globally to support future growth. Aftermarket revenues represent 42 per cent of revenue and provide investors with relative earnings stability when economies weaken."
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