Volume 24, No. 7: S&P 500: How The Dollar Ate Equity In 1Q15


To no one’s surprise, the powerful dollar punished earnings in the first quarter. What may be a surprise: the dollar’s strength continued to chew into the value of cash in foreign subsidiaries, and it also corroded equity at an alarming pace due to the negative effects of translating foreign subsidiaries into dollars when rolling them up into consolidated U.S financial statements.
Recent stock buyback announcements indicate that more than a trillion dollars of stock may be sucked up by companies in 2015, even as the stock markets simultaneously scale new heights. The wisdom of buybacks is debatable – the last time a buyback record was set was in 2007, just before the financial crisis started – but the controversy usually settles on just a couple of familiar factors. One is whether or not capital investment is being starved just to make earnings per share look good. Another is whether or not the price being paid for shares makes for a compelling investment: is the company getting a good value for its dollars spent? The usual counter to either argument is that if the company can’t use excess cash, it should return it to shareholders. True enough. What isn’t often considered is that companies also need to maintain a capital structure to serve their shareholders for the long run. The strong dollar is chewing away the equity foundation of many multinational companies like termites in an oak floor. Ironically, it’s decreasing the value of their foreign cash holdings while they’re dedicating cash to buying back shares.
While equity is consumed by the translation effects of the strong dollar, and stock prices are high, it might be more sensible for companies to be net issuers of equity instead of purchasers. “Buy low, sell high” still seems like relevant advice in the management of capital structures as well as investing. Maybe companies and their CFOs have forgotten. In this report, we recognize that the dollar won’t necessarily continue to be as strong as it has – but we also recognize that its present effects merit watchfulness.

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