One big loser in the Scottish referendum debate is the pound. Sterling has fallen to a 10-month low as investors pull their money out of Britain ahead of next week’s vote.
It could fall another 15% next week if the Scots exit the union, according to Japan’s biggest bank, Nomura.
That would be bad news for the pound, but it could be good news for ARM Holdings (LSE: ARM), AstraZeneca (LSE: AZN), BHP Billiton (LSE: BLT), Diageo (LSE: DGE) and GlaxoSmithKline (LSE: GSK).
All five FTSE 100 favourites generate the vast majority of their earnings overseas. The weaker the pound, the more those earnings are worth once converted into their home currency.
A Yes vote could hit sink share prices, but these five stocks have more ballast than most.
First Do No ARM
ARM Holdings generates 95% of its earnings in dollars. As the pound recovered to a high of $1.71 before Scottish referendum fears took hold, its reported 17% rise in Q2 dollar earnings was worth just 9% in sterling.
Since then, the pound has dipped as low as $1.60, a drop of more than 6%. So the next set of company earnings should already show a lift from the referendum row.Â
Management recently said that ARM’s forecast group dollar earnings are in line with market expectations for 2014, a Yes vote would help it beat that target.Â
AstraZeneca, Pound For Pound
Global pharmaceutical company AstraZeneca earns 90% of its income outside the UK, although it reports in dollars. It also pays its dividends in dollars, and after recent sterling slippage, these are now worth more to UK investors.
AstraZeneca’s yield has fallen from nearly 6% to 3.8% over the last year, during which time the share price rose whopping 45%. But a rising US dollar should compensate for that.
With emerging market sales and group revenues rising, that’s another reason to treat AstraZeneca with respect.
BHP Billiton Digs Down
A further 15% fall in the pound would dramatically boost the income UK investors earn from companies that pay their dividends in dollars, such as mining giant BHP Billiton.
The company’s share price down almost 10% in the past month, lifting the yield from 3.4% in July to 4% today, and growing dollar strength has accelerated that return in real terms to UK-based investors. If the pound fell to $1.40, as some have mooted, then we’re talking big bucks.
The impact on reported earnings would be minimal, because BHP Billiton both generates almost all of its earnings overseas, and reports them in dollars.
Diageo Set To Go
Currency headwinds matter when you do most of your business overseas. Management at global drinks giant Diageo partly blamed adverse foreign exchange movements on its 8.5% drop in full-year revenues to $13.9bn, as stumbling emerging market currencies hit consumer demand.
The share price is up 5% in the last month, and although there is more to that than sterling’s fall, revenues will certainly feel the benefit if a Yes vote scuppers sterling.
Diageo’s dividend is priced in pounds, however, so don’t expect any good news there. Which is a shame, given its disappointing 2.8% yield, well below the FTSE 100 average of 3.43%.
So-So Glaxo
Like AstraZeneca, GlaxoSmithKline earns around 90% of its profits in foreign fields. At the end of the second quarter, with the pound standing strong at $1.71, management had cause to complain about currency headwinds.
These made bad figures even worse. Q2 turnover fell 4% at comparative exchange rates, but that multiplied to 13% at actual exchange rates.
Management will be happier today, with the pound at $1.62.Â
Glaxo’s dividend is paid in sterling, so no FX uplift there. Still, at 5.43%, who’s complaining?