Hello,
As we navigate a landscape of higher interest rates and financial uncertainty, we wanted to help the Simply Safe Dividends community better understand how well different businesses are positioned for these challenges.
In the analysis below, we reviewed the debt profiles of over 250 companies. This included looking at a firm's use of variable-rate debt and looming maturities, which result in higher borrowing costs and refinancing risk.
While scrutinizing balance sheets has always played a critical role when analyzing a company's ability to pay a stable dividend over time, this consideration takes on a new level of significance in today's financial climate.
Over the past two years, interest rates have risen at the fastest pace since the 1980s, as the Fed acted to slow inflation that had reached a 40-year high.
Following roughly a decade of loose monetary conditions with near-zero interest rates, companies are now confronted with higher financing costs that could squeeze profits in the coming years and make debt reduction a more pressing capital allocation priority.
The path forward for interest rates is uncertain, as are the underlying factors that drive the Fed's decision-making policy, namely inflation, employment, and the overall state of the economy.
While we don't know what direction interest rates will trend, we can delve deeper into a company's debt profile to better understand its preparedness for a higher-for-longer interest rate environment.
As such, across our coverage universe we analyzed the debt profiles of every REIT and utility, known for their reliance on debt, plus approximately 100 of the most popular, highest-yielding dividend stocks.
Based on our review, we expect the vast majority of our Dividend Safety Scores to remain stable since our ratings already placed a lot of emphasis on balance sheet strength.
That said, we encourage you to explore the data for your holdings and use it to help evaluate new income ideas.
Here is a link to download our debt analysis spreadsheet:
Inside, you can filter and sort the table or pull up individual companies for a quick snapshot (you can change the ticker symbol in cell B3):
(Note that variable debt amounts ignore any hedges or interest rate swaps a company might have in place to fix its interest payments for a period of time. However, in most cases, these protections expire within a few years.)
While debt profiles aren't the sole determinant of a company's viability or Dividend Safety Score, they can play an important role in building conviction when making investment decisions, depending on an investor's risk tolerance and outlook.
For example, suppose one of your holdings is down big this year. You might have more conviction to maintain your position after seeing that the company has no variable-rate debt, minimal maturities over the next three years, and a strong credit rating.
On the other hand, if you are losing confidence in a company's long-term outlook, a shaky debt profile might be the final nudge to part ways.
In either scenario, we hope this data will make you a more informed investor and give you greater peace of mind. Let's take a look at the companies that stood out to us.
Our Findings: Most Companies Appear Well-Positioned Across the 250-plus companies we evaluated, the typical firm carries around 15% variable-rate debt and has less than 15% of its fixed-rate debt maturing through 2025.
These aren’t overly concerning figures and reflect the more conservative nature of most businesses on our list. Many of the higher-yielding stocks we reviewed could be characterized as time-tested companies with dependable cash flow and solid credit profiles that helped them take advantage of favorable financing conditions during the pandemic. That said, a wide range of debt profiles exists, even for companies with investment-grade credit ratings. Some, like Walgreens (WBA), use a high amount of leverage and have over 50% of their debt either tied to variable interest rates or maturing over the next two years. These businesses feel a more immediate sting from higher rates and face growing pressure to prioritize debt reduction – perhaps at the expense of dividends. On the other hand, midstream giant Enterprise Products Partners (EPD) holds almost no variable-rate debt, and only around 10% of its debt matures through 2025. While higher interest rates may continue to impact the valuations of bond-like stocks, they shouldn't be a source of pressure on EPD's cash flow.
In the lists below, we highlighted companies with strong debt profiles. You can use these lists, broken out by REITs, utilities, and other types of companies, to get ideas for further research.
Here is another link to download our spreadsheet if you would like to review some of your holdings or continue hunting for ideas:
Notable Companies (excluding REITs and utilities) Outside of REITs and utilities, which are covered below, here are companies that stood out to us for having solid credit ratings, low dependence on variable-rate debt, and well-spread debt maturities. The list is sorted alphabetically:
Notable REITs Most REITs rely on issuing debt to purchase properties and finance development projects. When interest rates rise, acquisitive growth can slow and profits can get squeezed if rent increases aren't enough to offset higher borrowing costs.
Furthermore, higher interest rates can place downward pressure on property valuations, complicating impending debt refinancings in challenged real estate markets like offices.
Here are some REITs from our coverage universe, sorted alphabetically, that have strategically managed their debt profiles to weather these challenges, offering potential stability in an uncertain interest rate environment:
Notable Utilities Utilities are heavily dependent on debt financing to fund expensive infrastructure projects that take years to recoup their cost as state regulators cap the return the company can make on these investments.
To offset higher interest expenses, utilities generally depend on filing rate cases with regulators to request higher allowed returns. This process can take time, so the most insulated utility companies have well-staggered debt maturities and minimal variable-rate debt.
Here are some of the utility stocks, sorted alphabetically, that possess these qualities:
Closing Thoughts While this data analysis doesn't offer direct investment recommendations, it can be valuable for navigating the challenges ahead.
As interest rates rise, not all companies will tread the same path. Avoiding those with unfavorable debt maturity schedules and stressed credit profiles can prevent costly decisions – especially if the tide goes out.
Conversely, investing in companies better prepared to weather higher rates should provide more stable outcomes and reliable dividends.
In this ever-evolving financial climate, we remain committed to arming our members with the insights they need to build a portfolio that generates safe and reliable income.
We'll continue to monitor the implications of higher interest rates on the companies we cover, updating outlooks and Dividend Safety Scores as needed.
Thank you for reading, and feel free to reply with any questions.
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