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:EQNR).

About Statoil
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:

Source: OANDA (NOK per USD)

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

$2.44 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.

Take the worry out of dividend investing

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.