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Strong U.S. Dollar Dampens Earnings

Since mid-July 2014, the U.S. dollar has been on a tear. In that time, the Dollar Index has shot up over 17%.

If you had a European vacation planned for this spring, that’s great news. But the dollar’s charge hasn’t been quite as welcome for many U.S.-based multinational corporations.

Indeed, earnings season has been hard on a number of the market’s biggest companies. Here’s what you need to know going forward…

As the U.S. dollar strengthens, it puts a strain on domestic firms with significant overseas revenue. That’s because, when foreign currencies lose value relative to the dollar, profits translated back into dollars are diminished. Not surprisingly, this can lead to poor revenue comparables and even earnings misses.

And the pain isn’t confined to just one industry, either. Let’s take a look at a few of the areas feeling the headwinds from a strong U.S. dollar

Area #1: Beverage Companies. Two titans of the beverage industry, PepsiCo (PEP) and Coca-Cola (KO), both admitted to feeling the negative effects of the currency exchange in their recent earnings transcripts.

Coca-Cola reported that fourth-quarter earnings per share (EPS) faced a 10% currency headwind, while it expects a 5% hit to net revenue and a 7% to 8% blow to profit before tax for full year 2015.

Pepsi was a bit less specific, but admitted that foreign exchange effects would be a “significant” drag on earnings.

Area #2: Consumer Discretionary. Manufacturing giant, Procter & Gamble (PG), announced earnings on January 27, and the news wasn’t good. In the most recent quarter, PG experienced $450 million in after-tax foreign exchange charges, which put the fiscal year-to-date total at $650 million.

The company projects the total impact over the course of the fiscal year at $1.4 billion, which it calls the most significant fiscal year currency impact it’s ever incurred.

Area #3: Technology. Tech companies haven’t been immune to the dollar’s relative strength, either. Microsoft (MSFT), for instance, reportedly expects a 4% hit to revenue growth in the quarter ending in March because of U.S. dollar appreciation.

Even Apple (AAPL), the company with the world’s largest market cap, recently admitted that currency headwinds are taking a toll on its results. In its second-quarter 2015 forecast, Apple believes its gross margins and growth rate will be 1% and 5% lower, respectively, than they could’ve been without such strong dollar appreciation.

What Does It All Mean?

Clearly, foreign exchange headwinds are taking their toll. But what does that mean for us as investors?

Ultimately, not much. Most everything is cyclical, currencies included… but anticipating currency movements can be incredibly difficult. Of course, that hasn’t stopped everyone from searching for foreign companies when the dollar is weak, and vice versa. But much like timing the market, investing based on where you think the dollar will go is a failed proposition.

Instead, the best way to weather currency volatility is to continue investing in undervalued companies that are growing their dividends. Over time, this simple strategy will easily outperform… So stick with it, and you should be just fine no matter what the dollar does.

Good investing,

Chris Worthington

Chris Worthington

, Editor-in-Chief of Income

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