September is the month of rising interest rates. After a long wait over summer time, the FED met once again on September 17th, 2015 and decided to…NOT increase the overnight interest rate. Nonetheless, it is still a matter of time until rates increase. It would be naive to think we can continue in a 0% interest rate environment for long. In fact, it will eventually hurt our economy if we continue in this way.
As we are getting ready for what will probably be the start of a long path of interest rate increases over the upcoming years, I’ve jumped on my computer to do some research on companies with low debt levels. To make an interesting list, I’ve applied the following filters:
Financial Debt to Equity under 25%
Dividend Yield between 2% & 5%
5 Year revenue growth positive
5 Year EPS growth positive
5 Year dividend growth positive
Payout ratio under 80%
This generated an exhaustive list of 155 dividend stocks. The list is available at Dividend Stocks Rock. This list is a very good start to search companies with a solid balance sheet that won’t crumble when interest rates go up. Among this exhaustive list, I am highlighting 3 of them currently trading at a discount. Here they are:
Gentex (GNTX)
Gentex has found the secret of making money for a while: produce a high quality product, gain 90% of the market share in this narrow segment and protect your invention with patents. This is the GNTX situation with auto-diming mirrors. This product is currently offered on only 25% of cars and this market is believed to grow to 45% of cars sold in the next three years. This is on top of the fact that the automobile industry is on a good trend recently.
The company has over $550M in cash and equivalent and around $435M in total liabilities. The company is a real money making machine showing only positive free cash flow quarters since March 31st 2012. The recent price drop makes it an interesting stock pick for the rest of the year.
3M Co (MMM)
3M Company is definitely more diversified than a balanced mutual fund. It is present in various consumable product areas and the bulk of its sales come from business-to-business transactions. Roughly 50% of its products are consumable, which implies a very high rate of repeat business year after year. Product diversification is at the center of MMM’s business which offers continuous growth opportunities.
The company is not sexy as it won’t bring a new blockbuster product to market anytime soon. However, the company is more than dividend friendly with 98 consecutive years including a dividend payment. You can count on MMM to deliver its distribution on time.
Wells Fargo (WFC)
I’m adding a last company that is not part of the list. It didn’t qualify for 5 year revenue growth but I think this company deserves its place on this list. I decided to add WFC mainly because it is well positioned to benefit from rising interest rates.
With such high level of liquidity, WFC interest revenue will naturally increase each time the FED will increase its rate. This is like buying an automatic money making machine.
The overall economic situation in the US will also help WFC to show higher revenue figures. Unemployment rate is getting close to 5%, consumers started to spend more and new houses for sale are constantly increasing.
There are some great opportunities on the market right now
With the FED being so hesitant, this is enough for the market to keep dancing on the floor of volatility. If we would get a weaker earning season than expected, we might be very well placed to pick up great stocks at cheap prices. I hope it will happen 😉
From this DSR low debt equity stock list, I’ve already highlighted some of them!
Will they, won’t they….?! The Federal Reserve is trapped. I’ll be real curious how they wiggle their way out of this one. My guess is that they won’t raise interest rates until the global markets do it for them 🙂
-Bryan
They can’t really wait for the rest of the world to raise their rate. If they do, they will hit great inflation in the meantime. As soon as the oil price goes up (that’s only one factor), inflation will start rising again. I bet on a raise before the end of the year 🙂