Coca-Cola's Currency Risk

In a recent interview, Coca-Cola CFO John Murphy discussed the currency risks facing the company. For the most recent quarter, Coke's earnings were reduced 9 percent because of currency fluctuations. The increase in the value of the U.S. dollar is the primary driver of the loss. Murphy expects currency losses to be only about 6 percent in the third quarter. One interesting point in the article is the sheer scope of Coke's multinational operations: The company is exposed to more than 70 currencies.

Rhino Bonds

The number of black rhinos in the wild has fallen from 65,000 in the 1970s to about 5,500, putting the species at risk of extinction. Conservation Capital, which aims to maintain and even improve conservation areas, has come up with a novel approach to help increase the black rhino population in the wild, namely rhino bonds. Fifty million dollars worth of rhino bonds were sold, with the goal of increasing the black rhino population in Kenya and South Africa. Investors in the bond will receive payments based on an "outcome payments" model, meaning investor's return will be based on the black rhino population growth over the next five years. In other words, the more the black rhino population increases, the higher the return will be. The sale of this bond may lead to future bond sales based conservation outcomes.

Dollar Gets Expensive

The most recent Big Mac Index from The Economist shows that, using purchasing power parity to compare the price of Big Macs in different countries, the U.S. dollar is very strong. In only one country, Switzerland, is the currency overvalued compared to the dollar. In every other country examined, the currency is undervalued when compared to the dollar. When GDP is taken into account, five currencies are overvalued compared to the dollar. Looking at Britain, the pound reached a high of about 25 percent overvalued in 2008 to its current 16 percent undervaluation. Remember, a strong dollar means that U.S. consumers can buy foreign goods more cheaply, resulting in more imports. At the same time, U.S. exports become more expensive to foreign buyers, thereby reducing exports.

Taxes, Taxes, Taxes

While you are likely familiar with large salaries sometimes earned by professional athletes, like everyone else, taxes can take a big bite out of that salary. For example, Seth Curry earned an NBA record $34.7 million during the 2017-2018 season. Unfortunately, he only got to take home about 44 percent of that figure. The biggest bite was $11.7 million in Federal income tax, followed by $4.1 million in city and state tax. Of course, he was estimated to have earned $35 million in endorsements for the year, so his earnings effectively doubled, as did his tax liabilities. 

McDonald's Negative McEquity

A negative book value of equity is generally a bad sign as it often indicates a company has accumulated losses that have exceeded shareholder capital contributed. However, as with any other accounting number, it must not be taken at face value. For example, hamburger giant McDonald's has an interesting shareholder equity that indicates something entirely different. If you take a look, McDonald's Treasury stock has exceeded its retained earnings since 2016, which indicates that the company has repurchased more of its stock than it has reinvested from earnings. While this is a good thing for investors, it does create a problem when evaluating the company's financial ratios. For example, the ROE as calculated is negative, which is generally not good, but the 28 percent profit margin in 2018 is a very good sign.

Stocks In The Really Long Run

While we discuss stock returns for a fairly long historical period in the textbook, what about the really long run? Global Financial Data has constructed a World Index that extends back to 1601! When evaluated over four distinct economic regimes, total stock returns have varied from 5.05 percent to 9.98 percent and dividends yields have varied widely as well. The equity risk premium has also varied significantly, from .87 percent to 3.02 percent. Over the past 318 years, the equity risk premium has averaged 1.46 percent. Of course, we should caution that this is not a definitive risk premium going forward. For anyone interested in stock market history, we would recommend a look.

Women In Finance

So how do women perform in financial roles? Based upon research, often better than men. For example, the stock market reacts more favorably to acquisitions and SEOs when the company has a female CFO, female run equity hedge funds outperform those operated by men, and women tend to earn higher returns as individual investors. Now, new research indicates that companies with female CFOs are less likely to restate financial reports. In addition, companies with the lowest percentage of institutional ownership, the gap between female and male led companies widens.

Oracle's Credit Rating Lowered

S&P recently announced that it was lowering the rating on Oracle's debt from AA- to A+. The reason given for the downgrade was the $36 billion the company spent on stock repurchases in fiscal 2019. The buybacks have increased Oracle's debt-to-EBITDA ratio from 0 to 1.4 and debt has increased by $18 billion. During the same period, Oracle only spent $1.66 billion on R&D.