One risk that investors in foreign companies take on is currency risk. This is the risk that the currency of the country in which the foreign company is located will depreciate against the currency of the country in which the investor is located. The decline of a foreign currency could reduce the revenue and profit of a foreign company as viewed by investors in terms of their own currency even if the company actually did increase its numbers when denominated in its own currencies. For an example of this, let's take a look at the Norwegian energy giant Statoil (NYSE:STO).
Statoil is one of the largest energy companies in the world. According to Forbes, Statoil is the 26th most profitable company in the world regardless of industry. It was originally founded in the early 1970s by the Norwegian state in order to develop the country's massive offshore oil and gas reserves. The company was quite successful at developing these resources and, in fact, these offshore deposits located mostly in the North Sea and on the Norwegian Continental Shelf are still responsible for approximately 60% of the company's total oil and natural gas production.
Although the company has been greatly expanding its production activities to nations outside of Norway, Statoil still remains a Norwegian company and so reports its results and pays its dividend in the currency of its homeland. This currency is the Norwegian kroner (NOK).
The decline of the kroner
Early in November, the Norwegian kroner suffered a significant decline against the U.S. dollar, although it has begun to reverse this decline recently. This means that after this decline occurred, it took many more kroner to equal one U.S. dollar. This chart shows the magnitude of the decline:
This decline has served and will serve to have an adverse effect on Statoil's earnings and dividends.
Impact on revenues
The decline has had an adverse effect on Statoil's results, at least from the perspective of an American investor that is trying to compare it to an American oil company such as ExxonMobil (NYSE:XOM) or Chevron (NYSE:CVX).
Statoil announced its third quarter 2013 results on October 30, 2013. Here are its key figures from that quarter as well as their U.S. dollar equivalents as of 12:00 noon on November 4:
|Figure||Reported Value (in NOK)||U.S. Dollar Equivalent|
|Net Operating Income||NOK 39.3 billion||$6.56 billion|
|Adjusted Earnings||NOK 40.4 billion||$6.76 billion|
|Adjusted Earnings After Tax||NOK 12.1 billion||$2.02 billion|
|Net Income||NOK 13.7 billion||$2.29 billion|
The company announced its fourth quarter results on February 7. This report was somewhat disappointing, but it was even more so after converting its reported figures into their U.S. dollar equivalents. Here are the same figures from Statoil's fourth quarter results along with their U.S. dollar equivalents as of 11:00 a.m. EST on February 19:
|Figure||Reported Value (in NOK)||U.S. Dollar Equivalent|
|Net Operating Income||NOK 43.9 billion||$7.2 billion|
|Adjusted Earnings||NOK 42.3 billion||$6.97 billion|
|Adjusted Earnings After Tax||NOK 11.0 billion||$1.81 billion|
|Net Income||NOK 14.8 billion||
As you can see, Statoil's net operating income increased by 11.7% when measured in Norwegian currency but it only increased by 9.8% when measured in U.S. dollars. This difference is due to the Norwegian kroner losing value against the U.S. dollar. The same would be true when measuring the percentage change quarter-over-quarter of any of the company's other figures.
Impact on the Dividend
The decline of the Norwegian kroner also has an impact on Statoil's dividend. This is because Statoil announces and pays its dividend in Norwegian kroner. Of course, most Americans that buy the stock do so using the ADR that trades on the New York Stock Exchange and not the company's ordinary shares that trade on the exchange in Oslo. For ADR holders, the bank that acts as a sponsor for the ADR will convert the Norwegian kroner into U.S. dollars before paying out the dividend. This is why you receive your dividends in U.S. dollars. The amount of dividend received depends on the U.S. dollar to Norwegian kroner exchange rate, however.
Following its fourth quarter results announcement, it announced that it is increasing its annual dividend by 3.7% to NOK 7.00. This would be $1.15 at the current exchange rate. However, last year's dividend in U.S. dollars was $1.16 according to Yahoo! Finance. This dividend was paid prior to the kroner falling in value relative to the dollar.
This is perhaps the best illustration of the currency risk that investors take on when investing in foreign companies since, even though Statoil increased its dividend, the amount that would actually be received by American investors actually went down. The reverse would also be true. For example, if the kroner had gone up in value against the dollar instead of down then Statoil's dividend would have increased more than 3.7% for American investors.
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Daniel Gibbs has a long position in Statoil (ADR). His research firm, Powerhedge LLC has no position in any stocks mentioned. Powerhedge LLC has a business relationship with a registered investment advisor whose clients may have positions in any stocks mentioned. Powerhedge LLC is not a registered investment advisor. The Motley Fool recommends Chevron and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.