American Depository Receipts

American Depository Receipts, or ADRs, are stock certificates of a foreign company that are registered in the name of a U.S. trust company or investment bank, which issues receipts against the shares.

The receipts trade on the U.S. stock markets – Nasdaq or New York Stock Exchange – just like ordinary stocks.  Therefore they must meet the same reporting and accounting standard requirements of the SEC such as the filing of annual reports and timely disclosure of information.

A Balanced Portfolio

A balanced portfolio needs exposure to manufacturing and consumer goods, industries that are in short supply in Canada.  Foreign companies can offer greater potential – they are larger and have interests worldwide.  ADRs let you diversify by country and industry.

Keep Your Objectives In Mind

What are the objectives of your portfolio – an income stream, capital growth or a combination of both?   If you are looking for income there are many high dividend-paying companies.  For price gains you can invest in companies that have superior growth prospects, especially those that do business in emerging markets with their growing demands.

Unilever.  This Anglo-Dutch producer of branded consumer goods (Dove, Axe, Lipton, Sunlight) does business in 100 countries with increasing sales growth in China and India.  Pays a dividend of $1.32 per share.

Telefonica.  Based in Spain, this telecommunications and entertainment company operates in 25 countries.  The dividend payout is $1.72.

GlaxoSmithKline.  This is a world leading research-based pharmaceutical and healthcare company that is headquartered in the UK.  They also market consumer products such as Sensodyne, Gaviscon, Nicorette and skin care products.  It pays $2.11 per share.

And, if you’re not too particular about the so-called sin products check out:

Diageo.  Based in England, they are the worlds leading alcoholic drinks manufacturer and marketer with brands including Crown Royal, Smirnoff, Captain Morgan and Guinness.  The dividend is $2.49 per share.

British American Tobacco.  Sells tobacco products worldwide including Lucky Strike and Benson & Hedges.  It pays a whopping $3.70 per share.

What Are The Risks?

Keep in mind the risks associated with these investments:

Currency risk.  ADRs are denominated in and pay dividends in U.S. dollars.  As well, an unfavourable exchange rate in the originating country can depreciate the price of the underlying shares.  The dividend amount can vary.

Inflation risk.  A rise in inflation in the nation of the foreign company would decrease the real value of the receipts.

Political risk.  The stability of the government and policies of the country.

Are ADRs Right For You?

If you are just getting started in international investing, it’s easier to stick with a low-cost mutual fund or ETF.  Once you have some experience, ADRs can be a good way to achieve a more diversified portfolio and benefit from the higher growth rates in foreign markets with targeted investments in specific companies, sectors and countries.

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  1. Russ on December 15, 2011 at 8:01 am

    Another “risk” might be called “fee risk,” that is, holding an ADR during the record date when the depository bank charges a fee to holders of the ADRs. This often comes as a surprise to shareholders and depending on the ADR, can be quite onerous.

    • Boomer on December 18, 2011 at 5:13 pm

      @Russ: It’s important to determine all the charges and fees of any investment so there are no surprises.

  2. Juan on December 15, 2011 at 11:32 am

    ADRs can also be a great way to provide some foreign currency exposure to a portfolio. I know it can be easy to think that if one has a portfolio of companies that mainly derive their profits in USD and pay dividends in USD then foreign currency risk doesn’t exist but this isn’t the case. If a US based corp competes with a foreign corp [ie Japanese] and the yen goes way down but the USD stays constant then the Japanese corp can sell their products for much cheaper than the US corp and with time will probably gain a large market share. So if one has a portfolio where their companies compete with foreign companies, then currency risk exists.

  3. Juan on December 15, 2011 at 11:34 am

    [So yes, currency risk exists with ADRs, but in the long term in any globalized market, currency risk exists. The question for the investor isn’t so much how to buy assets in one given currency, but how to create a “safe” portfolio regardless of currency movements. ]

  4. Juan on December 15, 2011 at 11:37 am

    Now I really do like your article and I don’t mean to sound as if I’m criticizing you or anything like that. I’m just adding in my two cents 🙂

    • Boomer on December 15, 2011 at 2:36 pm

      @Juan: I did mention that an unfavourable exchange rate both between the originating country and the US and also between US and Canada can considerably reduce both the value and dividends paid – hence currency risk.
      Thanks for your comments.

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