Rising interest rates can impact companies in diverse ways, suggests Chuck Carlson; here, the dividend reinvestment expert and editor of DRIP Investor reviews two portfolio holdings that benefit from rising interest rates.
For companies carrying a lot of debt, rising rates can increase borrowing costs, especially if companies have to roll their debt by issuing new bonds at higher rates to pay off the old bonds when they mature.
Higher interest rates also present challenges for stocks with high yields, as higher interest rates increase the relative appeal of fixed-income instruments versus dividend-yielding equities. Rising interest rates can also impact demand for certain products and services.
Editor’s Portfolio component Equifax (EFX) is feeling the impact of rising rates on its important verification-services business. With mortgage rates hitting their highest levels in 13 years, it is likely that demand for mortgages and refinancings will decline. Equifax benefits from strong housing and mortgage markets as the firm provides the income and employment verification information that lenders require.
Wall Street is anticipating that the rise in mortgage rates will be a major headwind for the company’s profits in the second half of the year. While Equifax no doubt will see some slowdown, I’m not convinced the hit will be as bad as the stock’s price action is indicating. Indeed, these shares are down a whopping 43% from their 52-week high of $300 per share.
To be sure, Equifax typically carries a fairly high valuation, and its price-earnings ratio based on 2022 earnings estimates is still 21 — not exactly bargain basement. So, it is possible you could see these shares decline further if the overall market continues to probe new lows. While I’m not sure the stock has hit bottom, I have no problem with investors initiating purchases in the stock at current prices.
A case where rising interest rates should be beneficial to a company’s bottom line is Paychex (PAYX). This provider of payroll and human-resources services holds billions of dollars in client funds that are awaiting the release to pay various employment taxes.
Since Paychex keeps the interest on those funds, rising short-term rates should boost the interest stream from these held funds. After holding up fairly well, Paychex stock has succumbed to the selling pressures that have hit all stocks in recent trading.
These shares are now down roughly 20% from their 52-week high. However, as long as the economy doesn’t plummet into a serious recession, the labor market should remain reasonably healthy, which is a plus for Paychex. The stock’s 2.8% dividend yield provides a kicker to total-return potential.
Paychex is not cheap at 30 times the 2022 earnings estimate, and that valuation may need to come down a bit in the near term. However, the stock — which will report earnings on June 29th — could be nibbled on at current prices, with more aggressive buying done on price breaks below $100.
