Miller/Howard Investments
Miller/Howard Commentary
ADRs and Income:
When Dividend Cuts Should Not Set Off Alarms
Deepak Ahuja, CFA, Senior Research Analyst  |  Full Bio (PDF)


My name is Deepak Ahuja. I'm a Senior Research Analyst at Miller/Howard Investments. Today, I'll discuss the impact of foreign currency movements on dividend income. As we all know, fluctuations of international currencies can directly affect your investment returns. But what about their impact on dividends that you receive?

For investors in the US, American Depositary Receipts, commonly known as ADRs, are the most popular way to invest in foreign companies. ADR investors receive dividends in US dollars, which are converted from dividends paid in foreign currencies. In recent years, as the US dollar strengthened relative to other major currencies, the income from ADRs received in dollars has generally declined.

Investors in ADRs are essentially taking a position on currency exchange rates in addition to the foreign stock markets and specific companies. The impact to US investors in foreign stocks is clear, and it can be significant. Let's consider the returns for the MSCI EAFE Index, a common benchmark for international equity investments, in US dollars versus local currency. During calendar years 2013 to 2016, returns measured in US dollars lagged local currency returns by minus 6% per year on average. But this is not always the case. In 2011 and 2012, returns in US dollars and in local currencies did not differ from one another. Looking at calendar years 2002 to 2010, the index in US dollars beat local currencies by +5% per year on average. Not only must the investor keep an eye on earnings and profitability, but they also need to consider potential currency moves as well.

As an asset manager focused on income producing equities, we have seen firsthand the impact of currency on dividend income. Take, for instance, the ADRs of two British companies: Vodafone (VOD) and GlaxoSmithKline (GSK). Over the past three years, the dividends paid in British pounds, excluding special dividends, remained stable. GSK paid £0.80 per share each year, and VOD paid £0.11 per share in 2014 and 2015, and £0.12 per share in 2016.

US investors in GSK ADRs experienced a 22% decrease in income over that same 3-year period, and VOD ADR investors experienced a 15% decrease. The decrease follows the change in exchange rates between the US dollar and the British pound.

So how much importance should an investor give to potential currency moves when considering foreign stocks? As with many questions on investing, the answer depends on one's time horizon. Traders and currency speculators may seek to trade on a Brexit-like event. However, we, as long-term investors, believe that exchange rates can help explain why dividend income can decrease in a portfolio that is focused on dividend growth. Currency moves are often a symptom of underlying short term concerns. However, we prefer to focus on the fundamental issues, such as a nation's political stability and economic progress. For instance, we have shied away from companies in Brazil as the country works through political corruption scandals amid a severe recession.

Generally, the US dollar has been in a long downtrend since the unwinding of the Bretton Woods System in 1971. After two significant rallies since then, the US dollar resumed this downward trend. Predicting when or if a trend will reverse is difficult, but with a weakening dollar we would expect an additional boost to the income received from ADRs.


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