In his recent annual letter to Bershire Hathaway Inc shareholders, Warren Buffett discussed the strong U.S. dollar and its potential negative impacts on Berkshire’s “Big Four” holdings: American Express Co AXP 0.64%, The Coca-Cola Co KO 0.24%, International Business Machines Corp IBM 1.1% and Wells Fargo Corp WFC 0.04%.
How Does A Strong Dollar Hurt American Companies?
With European and other global economies slumping throughout 2014, the dollar has performed well against many foreign currencies. While that change is great for Americans buying products abroad, American companies that derive a large portion of its business overseas get less out of its international businesses during times of dollar strength.
How Does This Affect The “Big Four?”
In Q4 of 2014, IBM generated more revenue from its international operations than its business in the Americas. Coke is even more heavily reliant on overseas revenue than IBM, as about 75 percent of its business comes from overseas. American Express CEO Jeff Campbell specifically mentioned “forex exchange headwinds” in the company’s most recent earnings release.
Aside from pressures on international profits, another major problem with a strong dollar for big banks such as Wells Fargo has to do with the new post-Financial Crisis bank regulations. According to the Wall Street Journal, the strong dollar could potentially put American banks at a disadvantage to foreign banks because a strong dollar makes the American banks’ dollar-denominated assets and operations appear large when compared to European peers. These imbalances could lead to American banks having to hold higher amounts of capital on its balance sheets than European banks.
Buffett’s Comments
Speaking of his outlook for the “Big Four,” Buffett shared his concern over the strong dollar with shareholders. In his letter, Buffett specifically warned that “2015 will be a tough year for the group, in part because of the strong dollar.”
Obviously the issue is not affecting Buffett’s notoriously long-term opinion of the four stocks, as Berkshire increased its stake in all four companies in 2014.
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