In some cases, with the U.S. dollar as the world’s leading reserve currency, the strong dollar is a positive. But there is one group that the strong dollar hurts, and that’s companies with a large amount of overseas product or service sales. For investors that own stock in these companies, a couple of quarters of a red-hot greenback can push earnings lower, and that in turn can weigh on share prices.
So what are investors to do? One good idea is to look for companies that primarily do business here in the United States. The lack of exports is a positive, and the potential for tax cuts and a strengthening economy can also add fuel to the domestic fire.
With the S&P 500 deriving 40% of total profit abroad, and 50% when you back out the financials, it makes sense for investors to buy stock in companies with the bulk of the profit coming from their U.S. business, especially with the dollar getting stronger almost daily. We screened the Merrill Lynch research database for stocks rated Buy that do the bulk of their business in the United States.
This company has had an incredible run this year but is off over 5% in 2017 trading. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.
With its shares trading at a very cheap 14.3 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.
AT&T is in the Merrill Lynch US 1 portfolio and has several major catalysts likely to drive strong network traffic demand: DirecTV Now and Mobile, “Data-Free TV” for DirecTV/U-Verse subscribers and increasing penetration of unlimited data plans. Many on Wall Street believe that the company is well-positioned to address ongoing traffic requirements, with additional LTE capacity available and the ability to leverage small cell deployments.
Other top Wall Street analysts have cited the company’s positive commentary on free cash flow and improving video/broadband trends later this year, with single truck-roll and new converged offerings expected to be coming next month.
AT&T investors receive a 4.8% dividend. The Merrill Lynch price objective for the stock is $46. Wall Street’s consensus price target is $41.48. Shares closed Thursday at $41.01.
American Electric Power
This industry leader is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
Many on Wall Street feel that the stock trades at a discount to its utility peers and they feel it deserves a premium. The analysts note the company has a less volatile earnings stream, and they see the potential for earnings upside due to changes in legislation in Ohio. Also trading at a discount to peers could lead to a premium valuation.
AEP shareholders receive a 3.7% dividend. Merrill Lynch has a $63 price objective. The consensus target is $67.19. Shares closed on Thursday at $63.29.