Thanks to the Federal Reserve reacting to the novel coronavirus pandemic, U.S. interest rates are at the lowest levels in, well, forever. At its meeting in mid-September, the central bank left the Fed funds rate unchanged at zero to 0.25%.
A big reason why interest rates are important to investors is that history shows us that some assets are positively correlated to rates – in both directions. For example, if one wants to know why financial services stocks are being drubbed this year, low rates tell the story. Conversely, assets such as gold, high dividend stocks and capital-intensive sectors, such as real estate and utilities, often benefit from declining borrowing costs.
In fact, there’s actually a palpable burden on those assets and others to perform well when rates are low owing to historical precedent.
“Lower interest rate should stimulate investment and kick start the entrepreneurial zeal dampened by the Covid-19 pandemic,” said Mohammad Niamat Elahee, international business professor at Quinnipiac University in Connecticut. “Given the fact that Covid-19 has negatively affected almost every business sector in almost every single country in the world, a low interest rate is needed by everyone, perhaps except the depositors. The invisible hand of capitalism sometime needs hand holding and a lower interest is just the helping hand that almost every business sector now needs for their survival and growth.”
With that in mind, let’s have a look at some stocks that should benefit from diminished borrowing costs.
- Amazon (NASDAQ:AMZN)
- Apple (NASDAQ:AAPL)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- Boeing (NYSE:BA)
- Coca-Cola (NYSE:KO)
Best Investments For Low Interest Rates: Amazon (AMZN)
Given its durability during the course of the Covid-19 pandemic, Amazon may not be the first stock to come to mind when investors think of beneficiaries of low interest rates. However, the e-commerce giants runs a capital-intensive business. Amazon has substantial industrial real estate needs and as online shopping demand grows, which it’s doing, the company needs more and more real estate.
Amazon is a prodigious generator of free cash flow, but one of the things that makes this company such a force is that it reinvests in its businesses, using that cash to build dominant market share. Investors have long been at peace with the company’s spending patterns and while that cash could be used for less sexy endeavors, Amazon can opt to finance its warehouses because it can borrow remarkably cheaply.
Earlier this year, the company sold $10 billion of corporate bonds at rates ranging from 0.4% to 2.7%. The higher the interest rate, the longer the maturity. The fact that Amazon was able to sell three-year bonds at 0.4% and 40-year bonds at 2.7% is a testament to this company’s stout credit quality and shows this is a low interest rate winner.
Apple doesn’t have an AAA credit rating. Not many companies do, but that’s not a knock on the iPhone maker. It’s rated AA+ by Standard & Poor’s and a strong case can be made that this company should be in the prestigious AAA camp.
As of the end of the second quarter, Apple had $194 billion in cash and $113 billion in debt. The latter category has since increased as the company sold $5.5 billion worth of bonds across several tranches in August, but with that pristine credit rating and fortress balance sheet, Apple is able to borrow cheaply. The company uses a fair amount of proceeds from bond sales to fund buybacks and dividends, a strategy that’s cause for alarm with financially flimsy companies, but Apple is the opposite.
“Apple’s fiscal third-quarter revenue increased by 11% year over year to $60 billion as its iPhone segment returned to growth and reported a 2% rise in revenue compared with the same period last year on the strong iPhone SE launch, economic stimulus and the lifting of shelter-in-place orders in certain geographies,” according to S&P.
Historically, technology stocks aren’t viewed as low interest rate winners because that scenario is usually indicative of a weak economy, but Apple is defying that conventional wisdom this year with a gain of 56.59%.
Berkshire Hathaway (BRK.A, BRK.B)
Warren Buffett’s Berkshire Hathaway is another example of an issuer with a stellar credit rating (Aa2 on the Moody’s scale). The conglomerate is classified as a financial services stock and derives significant chunks of revenue from its insurance businesses – two traits that make the stock vulnerable to low interest rates.
However, Berkshire has a history of leveraging low interest rates. In fact, the company has previously borrowed money at negative interest rates, meaning borrowers are paying Berkshire for the privilege of owning its bonds. Earlier this year, Berkshire sold $1.8 billion in yen-denominated debt at just 1.05%.
Berkshire is one of the last companies that investors should worry about when it comes to bond sales. Obviously, Buffett’s outfit can borrow at rock-bottom rates. Second, cash raised in the debt markets is usually put to good use by the conglomerate. One avenue for deployment is loaning capital to companies that need some help at rates that far out exceed what Berkshire borrowed the cash at in the first place.
In an ordinary operating environment, industrial companies are split proposition when it comes to low interest rates. Higher rates could be construed as a sign of a strong economy, benefiting economically sensitive stocks, such as Boeing. Conversely, lower rates are of assistance to this sector because of its capital-intensive nature.
Specific to Boeing this year, low rates amount to a lifeline. The aerospace and defense giant sold $25 billion worth of bonds across seven tranches in April, with one tranche featuring a 40-year maturity. At that time, Boeing’s credit rating was just one notch above junk territory, so the company wasn’t selling bonds at Amazon/Apple interest rates. Still, it’s scary to think about the coupons Boeing would have had to put on that debt if rates weren’t low.
The added benefit of Boeing tapping bond markets at favorable rates is that it was able to refuse assistance from Uncle Sam, which would have handcuffed the company in its quest to restore shareholder rewards.
Coca-Cola stock yields 3.4%, which is considered high these days. Most of the time, the soft drink makers dividend yield is considered above average and that’s one reason investors gravitate toward consumer staples stocks. And that’s the reason this sector usually thrives when rates decline.
“Sectors that are usually positively impacted by low interest rates include utilities, health care, consumer staples and pharmaceutical,” said Eric Brisker, a finance professor at the University of Akron in Ohio.
Coca-Cola will soon enter the competitive hard seltzer fray and that could be a catalyst for the moribund stock, but investors may just want to focus on the multi-decade dividend increase streak and the defensive posture of this familiar staples name.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.