Investors who are looking for undervalued equities increasingly know that one of the prime hunting grounds for value can be the shares of companies listed on well-run foreign exchanges – which frequently trade at lower multiples than their peers in the US. In many cases that allows US investors to buy securities with higher dividend yields and even higher growth rates than otherwise comparable US companies.
Many foreign-based companies’ shares can be traded on US exchanges as ADRs (American Depositary Receipts), although the ease of trading ADRs is frequently misunderstood even by professional or institutional investors. Most foreign securities cannot be traded on US exchanges unless they are converted to ADRs.
Some US investors do not want to own shares that are traded on foreign exchanges, for easily understandable reasons related to differences in currency, time zones, accounting rules or laws – or language. But since the US markets are the largest in the world, these hesitations on the part of some US investors can create value for others.
What is an ADR?
An ADR is a US security that is issued by one of a handful of “depositary banks” that basically guarantee that the securities underlying their receipts are real, and held on deposit by the bank.
- ADRs trade in US dollars, no matter what their “home” currency is
- ADRs pay dividends in US dollars
- ADRs are US securities and can be accurately reported on brokerage statements, and held by DTC, which is the “gold standard” of securities clearinghouses. Just to be clear, DTC will not hold the foreign securities that are not converted to ADRs.
The ADR banks are primarily: Bank of New York Mellon, JP Morgan Chase, Citibank, and Deutsche Bank.
ADRs can trade on any US exchange, depending on the level of disclosure and compliance the company is willing to sign up for. By the numbers, most ADRs – including big multinational companies headquartered outside the US– are traded on the over-the-counter market, primarily on the Pink Sheets or the OTCQX, which is an upgraded subset of the Pink Sheets. ADRs usually have 5 letters in their ticker symbols, but not always.
We will return with Part 2 of our ADR post, but here are a few examples of ADRs you might know:
Oslo-based Opera Software (www.opera.com) is a maker of free browsers for computers, mobile phones and devices and earned international headlines when it was chosen by Apple to be used on the iPhone . Opera trades as OPERA.OL on the Oslo exchange. Its ADR listing is OPESY.PK.
London-based Britvic (www.britvic.com) is one of Europe’s leading soft drink companies with operations mainly in the UK, Ireland and France, and a distribution partnership with Pepsi in those countries. Britvic soft drink brands include Robinsons, Tango J20 and Fruit Shoot. The Fruit Shoot drink is now being sold in parts of the southern US. Britvic trades as BVIC.L on the London exchange. Its ADR listing is BTVCY.PK.
Mexico-based Grupo Modelo (www.gmodelo.mx) is the largest brewer in Mexico and owner of 63 percent of the Mexican beer market, according to Wikipedia. Its well-known international brands include Corona, Modelo and Pacifico, and brews other local beers as well. It trades on the Mexican exchange as GMODELOC. Its OTC ADR listing is GPMCY.
(to be continued…)