With the Federal Reserve now expected to raise interest rates to between 1.75 and 2 percent by the end of the year, investors are scrambling to protect their portfolios from the potentially negative effects that higher rates will bring.
While higher interest rates tend to exert downward pressure on the stock market, there are some companies that are all but immune to them. Here are three stocks you should consider for riding out the coming Fed rate hikes.
Verizon (NYSE:VZ) is one of the blue-chip stocks that are most likely to succeed in the current market environment.
Like most telecom companies, Verizon does carry a fairly heavy amount of debt on its balance sheet. The company’s debt-to-equity ratio stands at about 1.92, introducing a degree of debt-related risk.
The good news, however, is that Verizon’s debts are mostly locked in at low, fixed rates. While the rate hikes this year will make it more expensive for Verizon to borrow going forward, they won’t affect the company’s existing debt load.
Aside from the ability to ride out the effects of rising interest rates on its debts, Verizon appears to be in a strong position as a company.
In 2021, the company delivered earnings of $5.32 per share, up from $4.30 in the previous year. Revenue growth wasn’t as impressive, but Verizon’s full-year revenues did rise 4.1 percent to $133.6 billion in 2021.
Verizon is also quite attractive for its strong dividend payout. As of the time of this writing, Verizon shares yielded 5 percent, paying $2.56 per year. The telecom giant has been steadily increasing its dividend for the last 15 years and shows no signs of letting up any time soon.
Stable, high-yield stocks of this sort are excellent to hold during periods when higher interest rates could affect share price growth. Even if the market’s returns are blunted by higher rates, investors can rely on dividends to bolster their gains.
While Verizon’s upside isn’t massive compared to some high-growth tech firms, analyst ratings do suggest that it will see good returns over the next 12 months. The median target price for Verizon stock is $58.50, up 14.5 percent from the current price of $50.93.
Tying all of these advantages together is the fact that Verizon trades at a P/E ratio of just 9.56. This makes it a reasonably priced stock with ample room to grow, a generous dividend and an extremely stable business model. Given its ability to ride out rate hikes, all of these factors make Verizon an attractive buy at the moment.
Bank of America
As a finance company, Bank of America (NYSE:BAC) is in the rare position of actually being able to profit from higher interest rates. Bank of America engages heavily in the commercial lending business, where variable-rate loans are quite common.
According to the bank’s own projections, a 1 percent increase in interest rates by the Federal Reserve would allow it to bring in an additional $6.5 billion in revenue over the following year from loans it has already originated. This alone would be enough to make Bank of America a serious contender in a high interest rate environment.
Bank of America has also made strong earnings gains recently. In Q4, the company reported earnings of $0.82 per share, up 28 percent year-over-year.
Like Verizon, Bank of America pays a decent dividend, though its yield sits at a much more modest 1.93 percent. Importantly, the growth rate of the company’s payout is currently higher than the rate of inflation, making its dividends a safe haven for income in an era of rapidly rising prices.
Where Bank of America could shine most over the coming year is in share price growth. The median analyst target price for the company is $51, up 23.8 percent against the current price of $41.21. The lowest price target is $40, representing a potential downside of just 2.9 percent. Given analysts bullishness, it seems likely that Bank of America will generate significant returns for its investors over the coming 12 months.
Taken together, these factors make Bank of America an excellent buy opportunity as the Fed hikes interest rates. Unlike other companies that will only ride out higher rates, this commercial bank is in a position to actively profit from them due to its portfolio of variable-rate loans. Given that Bank of America has already been increasing its profits steadily in the absence of rate hikes, we can expect the bank to do extremely well as rates gradually rise in accordance with the new baseline Fed rate.
Package delivery giant UPS (NYSE:UPS) is a company that has shown itself to be resilient to rising prices due to the willingness of its customers to accept higher fees.
The company and its closest competitor, FedEx, have both successfully raised their delivery prices this year, and FedEx has added additional charges to cope with higher fuel costs.
Neither company seems to have seen an appreciable negative result, as consumers have broadly been willing to pay for the convenience and reliability they provide.
The factors that make UPS a standout stock over FedEx (FDX) are its ample free cash flow and rapidly rising dividend. In the 12 months ending in December 2021, the company’s free cash flow grew by 112.5 percent to reach $12.32 per share for the year. This leaves the company in a very strong position to endure rising rates, especially if its customers continue to accept higher costs.
The company’s dividend is rising markedly alongside free cash flow. Earlier this year, UPS increased its dividend by an incredible 49 percent over its previous level. This places the current dividend yield at 2.76 percent or $6.08 per share. Assuming its cash flow growth continues, it’s very reasonable to expect strong dividend growth from this stock in the coming years.
Analyst price targets show UPS having good upside potential in the coming year. The median target is $249, up 16.1 percent from the current price of $214.55. The lowest rating places the stock at $150, a loss of about 30 percent.
It should be noted, however, that the median target out of 27 forecasts sits much closer to the highest target price of $275. This makes the low rating an extreme outlier and implies that it represents a very unlikely scenario for the stock.
Between strong business prospects and excellent growth in both cash flows and dividends, UPS is clearly in a good position to withstand rising interest rates. Higher fuel costs and rising labor expenses could present some challenges, but UPS seems to be more than equipped to handle them at this time.
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