
After the recent stock price plunge, investors in these highly uncertain times benefit most from stability, quality and liquidity. Equities with little or no debt and companies that pay dividends are therefore a no-brainer.
Because of historically low interest rates, there has been a run on cheap loans in recent years. That has created a massive corporate debt bubble that could burst at any time, Investorplace warns. Low-debt companies will be in the best position to survive the pandemic, according to the investment website.
Because it is nearly impossible to time the bottom of the market, it may be wise to start slowly to build equity positions. Of course, it is wise to be selective, given the risks.
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Facebook has less money in its coffers than other tech giants such as Amazon, Netflix and Google, but the group does not have a penny of debt. Partly for this reason, Investorplace expects Facebook to be one of the big winners during a corona recession.
While Facebook will undoubtedly suffer from a downturn in ad spending by companies, the social media giant is expected to see a huge increase in user numbers on Instagram, Facebook, WhatsApp and Messenger in the coming months as more and more people try to stay connected from their homes.
Alphabet, the parent company of search engine Google, has a modest debt load, with a robust cash flow that is strong enough to continue meeting payment obligations. On top of that, Alphabet has $90 billion in cash on hand, which will come in handy if competitors run into trouble due to liquidity shortages.
This huge amount of cash will allow Alphabet to invest in research and development, such as self-driving cars, during the coming recession, rather than management having to worry about the viability of the company.
Like companies with low debt, companies with solid dividend payouts offer stability for investors. Meanwhile, many companies, including a large number of European banks and insurers, have temporarily halted their dividend payments at the request of central banks. This leaves extra money to deal with the corona crisis.
But there are also companies that are able to continue their dividend payments. 3M, one of the largest suppliers of mouthguards in the US, is one of them, according to Investorplace.
3M is a true dividend aristocrat: it is one of the few companies that has steadily increased its dividend payments over the past 50 years. Its dividend yield currently stands at 4.26%, and Investorplace assumes that a cut is the last thing the company would want to implement.
This American defense group – also an aircraft manufacturer – is in many ways a reliable investment, according to Investorplace. It currently has 144 billion worth of orders outstanding, including the group’s new F-35 warplanes and missiles. That offers investors a lot of stability.
Lockheed’s dividend yield of 2.6% is not as generous as 3M’s. However, according to Investorplace, the company is able to continue paying dividends even when the economic situation worsens.
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It is for this reason that while choosing a safe-bet stock, a prudent investor should be aware of its debt level. If a stock is highly leveraged, which means it possesses considerably high debt, it is wise to avoid it.
Considering the aforementioned discussion, a low-leverage stock should find a place in an investor’s portfolio. For measuring this leverage, several ratios have been used historically. The debt-to-equity ratio is one of the most common among such ratios.
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A company with a lower debt-to-equity ratio shows improved solvency for a company.
With the third-quarter earnings season approaching, investors must be eyeing stocks that exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns. However, an investment strategy based solely on the debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening criteria to include some other factors.
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Do you want a high or low debt as a company?
From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money. While a low debt ratio suggests greater creditworthiness, there is also risk associated with a company carrying too little debt.
Is debt bad for stock?
Generally, too much debt is a bad thing for companies and shareholders because it inhibits a company’s ability to create a cash surplus. Furthermore, high debt levels may negatively affect common stockholders, who are last in line for claiming payback from a company that becomes insolvent.
How does debt affect stock price?
When a company borrows money, stockholders’ earnings per share (EPS) is negatively affected by the interest the company will have to pay on the borrowed funds. Therefore, under a typical scenario, stock prices will be less affected than bonds when a company borrows money.
Are low debt stocks good?
Low debt businesses are unaffected by a slowing economy or an increase in interest rates. They can run their business even if the economy is slowing down. Low debt firms are low-risk investments preferred by both amateur and professional investors. AS they are low debt companies that can provide superior returns.
Where can I find a company’s debt?
A company lists its long-term debt on its balance sheet under liabilities, usually under a subheading for long-term liabilities.
Advantages of low debt firms
By having less debt or zero debt, companies send a signal to the outside word that they are able to manage their funding requirements predominantly through internally generated cash and thus they are cash-rich firms.
Can a company grow without debt?
Debt dramatically increases risk, as many business owners learned in the recent economic downturn. Businesses without debt not only survived, they prospered. They made deals and bought out their competitors for pennies on the dollar, because they used their money to grow—they didn’t have to make payments.
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