Wednesday, October 8, 2014

Is international exposure overrated?

International diversification has always been sold on individual investors, as a means to reduce volatility in returns and enhance their portfolio returns. In essence, when US markets zig, the international markets would zag and vice versa. This might have been a great strategy a few years and decades ago, but in out globalized society, it might be less of a factor. Presently, global markets are increasingly moving at same pace, because of globalization. This correlation was evident during the financial crisis of 2007 – 2009, when all global markets tanked.

In a previous article I discussed the pros and cons of international diversification. I came up with more cons for dividend investors than pros. I tried to look at international exposure using another angle, and calm down US dividend investors that increased international exposure would not really add that much to the stability of their dividend incomes.

In the table below, I have listed the ten companies with the highest weight in the S&P 500. In addition, I have also listed the percentage of revenues that each one of these companies derives from their international operations. The ten companies with highest weight in the index accounted for approximately 18% of S&P 500. On average, these global companies derived 48% of their revenues from international operations.

Name
Ticker
Sector
Weight
International Sales
Apple Inc.
AAPL
Information Technology
3.46
61%
Exxon Mobil Corporation
XOM
Energy
2.3
64%
Microsoft Corporation
MSFT
Information Technology
2.18
52%
Johnson & Johnson
JNJ
Health Care
1.69
55%
General Electric Company
GE
Industrials
1.46
53%
Berkshire Hathaway Inc. Class B
BRK.B
Financials
1.45
16%
Wells Fargo & Company
WFC
Financials
1.41
5%
Procter & Gamble Company
PG
Consumer Staples
1.3
65%
Chevron Corporation
CVX
Energy
1.29
59%
JPMorgan Chase & Co.
JPM
Financials
1.28
45%

Each of these companies has different year-end dates. I tried to analyze the latest annual reports and other publicly available corporate information out there, which was 2013 for the majority of situations. 

If we were to extrapolate the results from this sample to the whole universe of stocks in the S&P 500, one can conclude that a large portion of revenues for US companies is derived from international operations. As a result, US investors who purchase shares in US multinationals such as Procter & Gamble (PG) or Johnson & Johnson (JNJ) can gain international exposure simply by investing in these US stocks. These global conglomerates operate businesses in many countries, and generate diversified streams of income from these international locations. These cashflows are then used to grow the business, with the excess distributed to shareholders as dividends.

As a result, I believe that adding internationally listed stocks would not dramatically improve the performance of a dividend portfolio. By purchasing US stocks with global operations, the domestic US dividend investor gains exposure to global income streams, without the hassle of international taxation or learning international accounting rules.

Full Disclosure: Long XOM, JNJ, GE, BRK/B, WFC, PG, CVX

Relevant Articles:

International Dividend Stocks – Pros and Cons
Dividend Investors Should Ignore Market Fluctuations
Dividend Growth Investing Works for Everyone Willing to Put the Time Into It
My Retirement Strategy for Tax-Free Income
Do not despise the days of small beginnings

8 comments:

  1. DGI,
    Nice to see the statistics all in one table. I own 8 of the 10 companies listed, all seven you own plus Apple. Maybe one of these days I will analyze my entire portfolio. I do own a few European companies (BP, UL and GSK), but they do a significant amount of business in the US. As you say, it's a global economy.
    Thanks,
    KeithX

    ReplyDelete
  2. DGI,

    I agree and disagree.

    International exposure whereby you purchase a company that is domiciled abroad isn't really necessary. I think that's outdated advice, before the economy became so global.

    However, exposure in terms of access to international consumers that are rising up into middle classes is absolutely recommended. And, as you point out, you can largely gain access to these customers via US multinationals. There's still some international companies out there with perhaps even better/faster growing exposure to some of these markets, but the point is still valid.

    Good topic!

    Best regards.

    ReplyDelete
  3. I agree. Never felt that international exposure was extremely important. Like you show, I get a decent amount from American companies who do business abroad. Not to mention I don't need to worry about withholding tax on certain companies/countries, which helps a lot.

    ReplyDelete
  4. Not sure I agree with you.Are you writing this perhaps Europe is doing poorly at the time? I would like to see what the so called experts say about this with WITH science based studies.

    ReplyDelete
  5. Anon, what exactly do you disagree with?

    DGI is a long term investor, so it is very likley he is not losing sleep over "situation" in Europe. Europe will be there 50 years from now.

    Do not forget investing is part art, part science.

    ReplyDelete
  6. Dividend payments are more consistent (and mostly quarterly) in the U.S.A. So getting international exposure without having to worry about taxes and inconsistent payments is what the average dividend investor probably wants. This strategy keeps investing simple so you can spend more time finding value.

    ReplyDelete
  7. Interesting numbers. I would agree that buying big brands like JNJ and PG give you international exposure. However I think it's still important to own international companies that is headquarters elsewhere than US to further diversify.

    ReplyDelete
  8. For me, international exposure is very important since I am based in Sweden. Because Sweden accounting for only 1% or so of the global economy, it would be very risky not to invest internationally. There is also no extra tax on dividends (well technically there is, but you get your swedish tax lowered by the same amount the next year). And most swedish companies only pay out dividends once a year. The main drawback with international exposure for me is currency risk.

    ReplyDelete

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