Yahoo Finance 2 Safe Stocks When Interest Rates Are Rising
Written by Kay Ng at The Motley Fool Canada
Interest rates were low for too long. From about 2009 to 2021, the policy interest rate in Canada oscillated between north of 0% and south of 2%. Since 2022, though, the Bank of Canada has rapidly increased the policy interest rate to 5% to curb inflation.
Higher interest rates have resulted in a meaningful correction in many stocks, including some high-multiple growth stocks that didn’t have sufficient earnings to support the high valuation and some stocks with high debt levels.
Here are a couple of stocks that appear to be safe to invest in, in a rising rate environment.
Intact Financial
A podcast posted on the Mawer Investment Management website this month explains it well. It talked about how property and casualty (P&C) insurance companies could benefit from higher interest rates. P&C insurance businesses typically have two core earnings streams: interest income and investment income, and underwriting profit. They collect premiums from customers, often invest in shorter-term bond portfolios, and therefore, get to reinvest at higher rates when these bonds mature.
One P&C insurer on the TSX you can investigate is Intact Financial (TSX:IFC). Sure enough, unlike the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, which is down approximately 9% since 2022, Intact Financial stock has appreciated north of 20%.
IFC and XIU data by YCharts
Intact Financial has a track record of achieving decent returns on equity. For example, its five-year return on equity is north of 13.5%. In the last 12 months or so, the dividend stock has been resilient and essentially traded in a sideways range.
At $198.44 per share at writing, it trades at a discount of about 11% from the 12-month analyst consensus price target according to TMX. So, it offers a bit of safety from the valuation, and it benefits from higher rates. The stock also offers a dividend yield of 2.2%.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is another stock that has been doing well in a rising interest rate environment. Since 2022, the stock has climbed about 39% versus the Canadian stock market decline of about 9%. To be sure, Couche-Tard stock appreciated about 27% over the past 12 months versus the market rise of about 2%.
The global convenience store consolidator, with many locations offering roadside fuel retail, is a highly defensive business. In the past 20 years, its earnings per share only dropped by about 1–2% over four years. In the other years, the popular retailer experienced earnings growth – often double-digit growth.
Although Couche-Tard has debt on its balance sheet, it can easily service the debt with tonnes of cash flow generation. Its long-term debt-to-capital ratio is about 39%. It maintains an investment-grade S&P credit rating of BBB+. Its trailing 12-month (TTM) interest expense was US$311.3 million, down from fiscal 2020’s US$326.7 million. So, in the TTM, it actually lowered its interest expense versus in the lower interest rate environment of 2020.
Couche-Tard’s dividend yield of about 0.76% is small, but it has been able to healthily increase its dividend at an extraordinary rate. For your reference, ATD stock’s 15-year dividend growth rate is approximately 23%.
In a rising interest rate environment, Intact Financial and Couche-Tard are both good businesses to be invested in. Investors can consider buying shares on weakness.
The post 2 Safe Stocks When Interest Rates Are Rising appeared first on The Motley Fool Canada.
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Fool contributor Kay Ng has positions in Alimentation Couche-Tard. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool recommends Intact Financial and TMX Group. The Motley Fool has a disclosure policy.
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