Many investors are programmed to believe that a decline in the value of the U.S. dollar is a bad thing. But what's interesting about a weak dollar is the profit opportunities it presents investors with. A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers. (Learn more in What do the terms weak dollar and strong dollar mean?)

While that scenario is unfortunate, investors can have their revenge, so to speak, by investing in the stocks of U.S. multinational corporations. Oftentimes, these are companies that investors are already familiar with. They are among the biggest companies not only in the States, but in the world, and earn a significant portion of their profits overseas.

As more emerging markets acquire a taste for American products, these companies will send more products across the globe, boosting their bottom lines and perhaps shareholder returns.

How Do Multinationals Benefit When the Dollar Falls?
The answer is pretty simple. Let's say a U.S. company does a lot of business in Europe and the euro is strong against the dollar. The company's profits from Europe will be denominated in euros and when all those euros are converted against a weak dollar, that means more dollars for the American company and a nice jolt to the bottom line. Better profit margins usually translate to better results for shareholders. (Learn how to examine a company's profitability with the help of profit-margin ratios, see The Bottom Line On Margins.)

The Quintessential Multinational
Two of the best example of U.S. multinationals are McDonald's (NYSE:MCD) and Procter & Gamble (NYSE:PG). Not only are these two companies among the biggest in the U.S., they are among the most recognizable on the global stage. McDonald's has unrivaled brand recognition and nearly every home in the world has at least one Procter & Gamble product in it.

Both companies derive substantial chunks of their annual sales from international markets, putting them in a prime position to benefit when the dollar slumps. Procter & Gamble in particular benefits when the dollar is weak because it manufactures a fair amount of its products in the United States. And two of its biggest rivals, Nestle and Unilever (NYSE:UN), are foreign firms.

Using the example of the euro, since Nestle and Unilever are European companies, a strong euro can hurt the bottom line at these companies, while P&G bolsters its profits by way of a weak dollar.

It's probably a stretch to say the executives of U.S. multinationals spend their time cheering for weaker dollar, but the reality is their companies benefit from the scenario. (The spot, futures and option currency markets can be traded together for maximum downside protection and profit; read Combining Forex Spot And Futures Transactions.)

Do Shareholders Benefit?
The simple answer is yes, they do. Empirical evidence exists to support the fact that shareholders in U.S. multinationals win when the dollar loses. Look no further than McDonald's. Compare a chart of McDonald's shares to the U.S. Dollar Index, which tracks the performance of the dollar against a basket of major currencies. The results are startling. The more Big Macs and fries that are gobbled up by diners in countries with currencies that are beating the dollar, the more McDonald's shareholders benefit.

While investors benefit from the capital appreciation in multinationals when the dollar is weak, it's hard to quantify whether the added profits translate into higher dividends for shareholders. That said, McDonald's and P&G have raised their dividends during dollar slumps, so it doesn't hurt the chances for a dividend hike when the dollar is declining. This is especially true when you look at companies as solid as these.

Another way shareholders can benefit when the dollar is weak is through acquisitions. A weak dollar can prove intoxicating for foreign companies looking to acquire solid U.S. companies on the cheap. And this isn't limited to small U.S. companies. Anheuser-Busch, a true American multinational and one of the country's most venerable corporations, was acquired by InBev(OTCBB:AHBIF) in 2008 due in part to the euro's strength against the greenback. (Learn more in our Acquisitions Tutorial.)

Made in America
There are other benefits to a weaker dollar for large U.S. exporters. For starters, they can raise their domestic currency prices, which translate to the same price overseas. Higher prices equal higher profits.

If the dollar stays consistently weak for extended periods of time, U.S. multinationals may also be compelled to keep more manufacturing and production operations in the U.S., because the cost of foreign goods can be higher. The trickle-down effect here is that more Americans are working and that benefits the U.S. economy at large.

And of course Uncle Sam likes it when giant multinationals make more money because that means they'll be paying more in taxes. While the increased tax burden is never welcomed by company executives, the IRS sure loves it and it is rarely punitive enough to meaningfully impact the stock price, so shareholders needn't be too concerned about the higher taxes a U.S. multinational pays. (Understanding the relationship between these markets can help you spot profitable stocks, read Currency Moves Highlight Equity Opportunities.)

From the shareholder's perspective, a weak dollar can be a good thing in moderate doses, but there are pitfalls to a prolonged dollar slide. Obviously, a weak dollar reduces purchasing power for American consumers, and this may send them over to generic brands rather than higher-cost premium offerings made by multinationals.

A weak dollar can also impact trade with nations with strong currencies. Some companies build plants or sign multiyear contracts expecting a certain currency conversion rate. A major change can really weigh on a company's bottom line to keep converting a weak buck into a strong local currency and it could lead foreign companies to reduce trade with the U.S. The downfall here is the potential for lost jobs and lower tax revenues.

The Bottom Line
At the end of the day, periods of dollar weakness can benefit shareholders in U.S. multinationals. Historical trends prove that, but those tidy returns usually come over periods of several quarters, not years. A dollar slump that extends into five or 10 years is not good business and makes U.S. companies and their shareholders vulnerable to acquisitions by foreign rivals. So if your portfolio has benefited from the dollar's slide for a few months, it might be time to break out the pom-poms and cheer for the greenback to rise. (For more, see What is political risk and what can a multinational company do to minimize exposure? and Play Foreign Currencies Against The U.S. Dollar - And Win.)

Related Articles
  1. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  3. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  4. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  5. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  6. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  7. Economics

    Governments Ask Tech Giants to Join War on ISIS

    In the US and Israel, governments have asked their respective nations' tech industries to help in the war against ISIS.
  8. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  9. Term

    What is Pegging?

    Pegging refers to the practice of fixing one country's currency to that of another country. It also describes a practice in which investors avoid purchasing security shares underlying a put option.
  10. Home & Auto

    Understanding Pre-Qualification Vs. Pre-Approval

    Contrary to popular belief, being pre-qualified for a mortgage doesn’t mean you’re pre-approved for a home loan.
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Do penny stocks trade after hours?

    Penny stocks are common shares of public companies that trade at a low price per share. These companies are normally small, ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center