It’s been a tough ride for Canadian investors in great U.S. companies. While all stock markets are down after last year’s credit crunch (and stocks almost everywhere except Canada have a negative return for the past ten years); U.S. stocks have been a particularly hard place to be for Canadian investors.

At the beginning of 2000 (Jan. 3), the S&P 500 index stood at 1498 points. Today, the index is at 1173. If you were unfortunate enough to pick that peak moment in January to invest, your ten-year return would be minus 21.5%.

The pain doesn’t stop there, either. Back then, the U.S. dollar (which you used if you bought U.S. stocks directly) cost $1.60 Canadian. As I’m writing this, the U.S. buck is slightly less than at par with the Canadian buck – about 98 cents. So on top of that 21.5% decline, you also have a 36% drop in currency. Adding up all this nastiness, a Canadian investor in U.S. stocks would only be able to get back 43 cents Canadian for each dollar invested ten years ago.

You don’t need an MBA to know that’s not such a great deal. That’s why I found it so interesting to recently hear Gord Nixon, CEO of the Royal Bank, saying that “I never short America and I never short the U.S. dollar. The United States has an instinctive ability to self-correct.”*

Some other interesting things are going on right now too. Despite the general gloom and doom, the February just past was actually the strongest month for dividends since the onset of the recent Great Panic. Of the S&P 500 companies, 47 started or raised cash dividends, and only one (Tesoro) cut its payout. Coca-Cola raised its dividend by 8% per year, General Dynamics by 10.5%, and consumer bellwether Wal-Mart by a whopping 15%.

We’re also seeing more stock buybacks: S&P estimates that share repurchases rose 37% from the third to the fourth quarter of 2009. There were 62 announced share buybacks valued at $40 billion in February, the biggest month since September 2008 (when the panic set in).

The most visible symptom of corporate cash continues to be the surge in mergers and acquisitions activity. The dollar value of deals that target U.S. companies is running 46% ahead of last year: $144 billion as of March 4. And some 55% of that is in cash form. (If you’re interested, the highest such figure in this decade was 57%, at the height of the private equity craze in 2007.) Some recent all-cash mega-deals include FirstEnergy’s $4.7-billion purchase of Allegheny Energy, and Bank of New York Mellon’s $2.31 billion deal for PNC.

So what’s a Canadian investor to make of all this? First, on stocks in general, I would put the last ten years into perspective. Looking back to 1871 (when effective records began to be kept), there have been only 14 ten-year periods out of a possible 138 when stock returns have been negative. That’s only just a smidgen over 10%. This teaches us an important lesson: that mentally extending the performance of the last ten years into the next ten years is probably always a mistake.

Second, if you look at all the great companies of the world, most are based in the United States. In my view, it’s a mistake to rule out investing in those giants – particularly at this point, when there’s room for optimism that the worst is over.

It’s likely time now for Canadian investors to start increasing their exposure to U.S. companies. This can be done with currency exposure, or through funds that are hedged against currency movements.

The bottom line is that as investors, of course we always want to buy low and sell high; but buying low is easy to say and tough to do. U.S. stocks, in Canadian dollar terms, are 60% cheaper to day than they were ten years ago – seems like a low to me.

*Financial Post March 30, 2010 page FP2, columnist Diane Francis

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