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Five FTSE 100 shares set to benefit from a plunging pound

27th September 2022 10:29

by Ben Hobson from interactive investor

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Stock screen expert Ben Hobson has found some of the best performing blue-chip shares that derive substantial revenues in America, and which could receive a big boost to profits.

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With the value of the British pound tumbling against the US dollar, investors are facing up to the dramatic impact that exchange rates can have on company revenues.

For firms that import goods and raw materials, or rely on international supply chains, a weaker pound is bad news. That’s because profit margins get squeezed when pounds no longer buy as much as they once did.

But on the flip side, a weaker pound can be good for exporters because their goods look cheaper to foreign buyers. Firms that generate sales in dollar-denominated markets also get a boost when they convert those greenbacks back to pounds.

With all this in mind, some investors try to position their holdings to benefit from currency swings. Yet because the movements are so unpredictable, experts generally advise against it.

Instead, there are two main ways for UK investors to get exposure to currencies like the dollar. One is to own US shares directly. Another is to buy UK shares that have substantial businesses across the Atlantic.

Buying and holding foreign shares has got much easier in recent years, although it does carry some exchange rate risk. That is because you have to exchange pounds for foreign currency, and back again, when buying and selling them.

By contrast, owning UK shares with big sales in foreign markets doesn’t carry the same uncertainty. It also means you can take advantage of the UK’s secret weapon when it comes to companies with international exposure: the FTSE 100 index.

An intriguing observation in markets over the past year has been the resilience of UK blue-chips. The main index is currently down by just 1%, which compares well to the 17.7% decline seen on America’s S&P 500.

Part of the FTSE’s strength has been down to the performance of blue-chip energy shares like BP (LSE:BP.) and Shell (LSE:SHEL). These stocks have soared on strong oil and gas prices. But they have also benefited from those commodities being priced in dollars.

It’s not just energy companies either. An estimated 75% of FTSE 100 revenues are earned in territories outside the UK - so the index is a useful place to look for currency diversification.

This screen shows some of the best-performing shares across different industry sectors in the FTSE 100 over the past 12 months that derive substantial revenues in America.

Share Name

Market Cap (£m)

Total sales last year (£m)

% of sales in the US

Dividend Yield (%)

1 Year Relative Price Strength (%)

Sector

BAE Systems (LSE:BA.)

24,779.0

19,521

43

3.3

45.4

Aerospace and Defence

British American Tobacco (LSE:BATS)

76,083.7

25,684

45.5

6.8

28.5

Tobacco

Pearson (LSE:PSON)

6,278.0

3,428

63.6

2.5

23.1

Media

Compass (LSE:CPG)

31,857.8

17,908

62.4

1.7

22.8

Consumer Services

Diageo (LSE:DGE)

85,898.5

15,452

39

2.1

11.0

Beverages

In terms of price strength, all five companies have seen their shares outperform the FTSE 100 index over the past year. BAE Systems (LSE:BA.), British American Tobacco (LSE:BATS), Pearson (LSE:PSON), Compass Group (LSE:CPG) and Diageo (LSE:DGE) all have substantial sales in foreign markets, in particular the US, and all report their financial results in sterling.

Given their international exposure, these firms are well used to explaining to shareholders how exchange rates impact on revenues. Given the recent slide in the value of the pound against the dollar, they may well now benefit.

As an example, defence company BAE derived 43% of its sales in the US in 2021. Together with a likely boost to sales as a result of increased defence spending in the west, the company looks well placed to benefit from the strong dollar.

Another is Compass, the food services business, which has a substantial US business that accounts for 62.4% of sales. Like many companies, Compass uses hedging to try and smooth out exchange rate effects over time, but the strengthening dollar is still likely to play in its favour.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

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    UK sharesTrading tips and ideasEuropeNorth America

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