Whether to Invest in Foreign Companies

I have taken some notice of negative comments regarding investing in foreign companies, particularly those that pay a substantial dividend such as Total, S.A. To my way of thinking, the decision as to whether to invest in a foreign company is resolved by the same method by which the decision to invest in a domestic company is resolved.

I analyse the margin of safety for each possible investment in the following manner: set a six-year time horizon; start with the entry price; account for the past five-years, as well as the projected three-years, EPS long-term average growth rate, which is linear (EPS-LAGR); include the trailing five-year dividend long-term average growth rate, which is also linear, (D-LAGR); assume the use of a DRIP net of taxes on the dividends; account for the U.S. state and federal capital gains taxes, assuming that the shares would be sold at the end of the six-year time horizon; account for the U.S. rate of inflation, which has averaged 3.74% since 1950. Then I compute the margin of safety as the ratio of the current purchase price to the value of the shareholding at the end of the time horizon discounted to present value based upon inflation. If the ratio is below 0.50, then I pass on to the next possibility; if the ratio is above 0.50, then I allocate no more than 5% of my net assets to the investment opportunity.

Also, I am intimately familiar with the international income and capital gains tax treaties with the United Kingdom and France as I work primarily in the area of international law. Under the treaty, and as applied by the U.S. IRS, the income and capital gains taxes paid in either France or the United Kingdom are recognized and are deductible as against income and capital gains that accrue in the United States. It just takes a bit of work to manage the paperwork. If, however, the transaction costs associated with reporting the income and capital gains taxes and declaring the deduction exceed the amount of the dividend income, or capital gains, then do not bother with the investment.

To me, TOT is no different.

I hope this helps.

Nathan A. Busch

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