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The Rising Pound Will Hit GlaxoSmithKline plc, BHP Billiton plc, ARM Holdings Plc, AstraZeneca plc And Diageo plc

A strong currency is a sign of global punching power, but it can leave investors on the ropes.

Sterling’s resurgence has dealt a few body blows to the FTSE 100, whose constituents generate more than three-quarters of their earnings overseas.

As the pound rises from the canvas, up 10% this year against a basket of currencies, some major UK companies are feeling a bit punchdrunk.

Astra’s Weaker

Global research-based pharmaceutical company AstraZeneca (LSE: AZN) is one of them. Of every £1 it earns, less than 9p comes from the UK. But its company headquarters are in Cambridge, while 8,000 of its 51,700 staff are based in the UK. They like to be paid in pounds.

So while overseas income is falling in relative terms, its UK cost base isn’t. Reporting in dollars shields AZN from some of today’s currency shifts, but its dollar dividends are now worth less to income seekers. At today’s exchange rate of $1.71, they’re earning 14% less than they did when the pound languished at $1.50. That’s a blow, given that the yield has fallen to 3.8% lately as the share price has recovered.

Glaxo’s Currency Worry

Pharma rival GlaxoSmithKline (LSE: GSK) also earns less than 9p in every £1 overseas. Its disappointing Q1 results were based on exchange rates of $1.66, €1.21 and Yen 171, and management was complaining about currency headwinds then. It said if currency rates held at that level for the rest of the year, it would knock an estimated 7% of 2014 sterling turnover, and 11% off core earnings per share. Today, the pound buys $1.71, €1.26 and Yen 173, so matters have got worse.

At least Glaxo’s dividends are priced in pounds, while the yield has risen to 5% on recent share price weakness. Investors have other matters on their mind right now, as the sex and bribery scandal intensifies.

BHP Billiton Digs Deeper

Big miners such as BHP Billiton (LSE: BLT) generate almost all their earnings overseas, but since they report in dollars, the impact of the stronger pound is limited. BHP’s dividends are also paid in dollars, however, so the real value of its 3.4% yield to UK investors has slipped.

Shifting metals prices will have a bigger impact on shareholder decisions. Aluminium has been rising lately, as motor manufacturer Ford shifts to the lighter metal to boost fuel-efficiency, but iron ore has been falling, and copper is volatile. Dollar weakness will support commodities that are priced in the greenback, but if the Fed stops hiking base rates, that could reverse.

Diageo To Go

Adverse currency movements were implicated in the 7.4% drop in sales at global drinks giant Diageo (LSE: DGE), as falling emerging markets currencies hit consumer demand. The sale of Jose Cuervo, political instability in Thailand and a Chinese crackdown on gift giving were also sobering.

Diageo’s dividend is priced in pounds, so that’s something, although at 2.6%, not that much. I banked a large slug profit on Diageo last year and the share price is down 10% since then. As the glory years of growth appear to have slowed, I’m in no rush to return.

ARM Is Harmed

ARM Holdings (LSE: ARM) has more to worry about than currency headwinds. Analysts are predicting a drop in Q2 revenues next week, as demand for smartphones and tablets slows. But foreign exchange shifts still have an impact on its numbers. ARM’s total Q1 dollar revenues rose 16% year-on-year, but only 10% in sterling terms. After years of breakneck growth, the share price is down 10% in the past 12 months. We’ll know more about ARM’s prospects next week.

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Harvey Jones has no position in any shares mentioned. The Motley Fool recommends GlaxoSmithKline and ARM Holdings.