TEL AVIV (TheStreet) -- The recent decision from Bank of Israel to cut its basic cash rate to a historic low of 0.25% could also bring down the dividend payment to investors in leading Israeli companies such as Teva Pharmaceutical Industries (TEVA - Get Report) and Check Point Software Technologies (CHKP - Get Report) .
Why? This decision may depreciate the Israeli currency, the New Israeli Shekel, against the U.S. dollar, which will translate to lower dividend payments.
The latest rate cut is prompted by Bank of Israel's goal to jump-start the economy, especially considering the current adverse impact of the war between Israel and Hamas.
Moreover, inflation in the past year was only at 0.3%, well below BOI's target inflation. Low inflation also indicates low economic activity in Israel.
This decision was also made the support Israeli exports in an attempt to devalue the NIS against leading currencies, including the U.S. dollar and the euro.
Following this decision, the exchange rate between the U.S. dollar and the NIS rose by 0.8% to 3.57 -- its highest level this year. If BOI were to take additional steps to heat up the economy, as other leading central banks have taken over the years -- the U.S. Federal Reserve's FOMC and Bank of Japan implemented long term bond purchase programs, or quantitative easing, and the European Central Bank reduced its deposit rate to a negative level -- this could depreciate the NIS even further.
Teva closed Wednesday up 0.11%, with shares at $52.28. Check Point's stock closed at $70.34 -- up by 0.92% .
For Teva investors in the U.S., this could reduce their dividend paycheck. In the past quarter, Teva paid a quarterly dividend of NIS 1.21, which was around 35.3 cents. If the U.S. dollar/NIS exchange rate were to fall by 10%, this could mean its dividend of NIS 1.21 will be roughly 30.8 cents per share, and its annual yield will decline from 2.6% to 2.3%.
Moreover, since a big portion of Teva's sales come from the U.S. -- 55% of its net revenue in the second quarter -- a devaluation of the NIS could also raise earnings in NIS. That could increase the taxes the company will have to pay to the Israeli tax authorities.
Therefore, the recent devaluation of the NIS may not benefit shareholders of Teva and other leading Israeli companies. Investors should pay close attention to the U.S. dollar/NIS exchange rate.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates TEVA PHARMACEUTICALS as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate TEVA PHARMACEUTICALS (TEVA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, attractive valuation levels, compelling growth in net income and good cash flow from operations. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
- You can view the full analysis from the report here: TEVA Ratings Report