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Two Winners on a Weak Dollar

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As Europe and China strengthen, the dollar has lost some of its value, and as recovery gains traction in the US, the dollar weakness will grow. But that doesn't have to be a bad thing.

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As the US Federal Reserve pursues a policy of essentially unlimited quantitative easing, investors have become increasingly concerned about the potential for a sharp devaluation of the dollar.

While that's a concern for American consumers and businesses that operate primarily in the US, the reality is that most major corporations wouldn't be hugely affected. Nearly half of S&P 500 (INDEXSP:.INX) companies' sales are generated outside of the US.

In fact, there are a number of US-based companies with significant for-eign operations for which a devalued dollar would actually pose a tailwind. We'll take a look at a few that would not only provide investors a hedge against a weaker dollar, but also offer moderate yields and lower volatility.

Western Union (NYSE:WU)
An estimated 43 million people liv-ing in the US today are foreign-born, counting both legal and undocu-mented residents, making up 13.5% of the population. Globally, an estimated 200 million people are living in countries other than those of their birth.

In fact, there are a number of US-based companies with significant for-eign operations for which a devalued dollar would actually pose a tailwind. We'll take a look at a few that would not only provide investors a hedge against a weaker dollar, but also offer moderate yields and lower volatility.

Most immigrants leave their home countries in search of jobs and a better life and they're eager to share their newfound wealth with the folks back home. In 2010, the latest year for which data is available, remittances from the US alone totaled $48.3 bil-lion, according to the World Bank. The global immigrant population sent home more than $440 billion that year.

Since 2009, the value of global re-mittance payments has been growing by about 4% annually. Prior to that period, average annual growth ran in the mid-teens as burgeon-ing wealth and a weakening dollar pushed immigrants to send more money home.

With more than 500,000 agents in 200 countries, Western Union claims a huge slice of that pie as the world's largest money transfer service. Historically, its rev-enue and earnings growth have fallen largely in line with trends in global remittance payments.

If you expect the value of the US dollar to decline either through infla-tion or diminished investor confi-dence, Western Union is a great play, because it's largely immune to dollar erosion. More than 71% of its revenues originate outside of the US and in foreign currencies.

Regardless of the dollar's direction, Western Union has plenty of room to grow. Despite its size, the company commands only 20% of the global market, giving it ample oppor-tunity to pick up share either through price competition or acquisitions.

Asia, Eastern Europe, and Latin America represent largely virgin territory for the company, offering huge expansion prospects. Western Union recently sealed a deal with Banco Ahorro Famsa, one of Mexico's largest banks, to offer money transfer services in 300 of its banks branches across the country.

The company is also working to build out its business-to-business offerings as well as prepaid money cards. It recently began pushing into digital money trans-fer through the Internet and mobile phones, reducing the need for custom-ers to go to an agent location.

While the company does carry a large debt load due to heavy invest-ment in its network, it typically gen-erates almost $1 billion in free cash flow annually. This cash has allowed it to pay a steadily rising dividend for the past five years and fund a large annual share repurchase program. Even if the dollar doesn't decline further, Western Union is a great buy.

Mead Johnson Nu-trition (NYSE:MJN)
Spun-out from Bristol-Myers Squibb (NYSE:BMY) in 2009, Mead Johnson is an excellent hedge against a declining dollar, while offering the stickiness of a consumer staples company.

Selling infant and children's nutri-tion products, Mead Johnson has a global presence, with almost 73% of revenues sourced outside of the US. Since becoming an independent company, Mead Johnson has averaged compound annual revenue growth of 8% per year.

As the ranks of the global middle class have grown, demand for pre-mium infant formula has burgeoned. China has been a major driver of that demand, with a market for premium formula currently valued at $8 billion annually and growing by about 8% per year. Mead Johnson has grabbed a 14% market share in the country. Latin America also presents a huge growth opportunity, as the region's birth rate and incomes continue to rise.

Free cash flow has risen to almost $500 million annually over the past three years, while earnings per share (EPS) have jumped from $1.99 in 2009 to $2.48 last year. Revenues should top $4 billion for the first time this year. That's funding a steadily ris-ing dividend, currently $.30 quar-terly, for a modest 1.7% yield.


Editor's Note: This article was written by Benjamin Shepherd of Personal Finance.

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