Interest rates were low for too long. From about 2009 to 2021, the policy interest rate in Canada oscillated between north of 0% and south of 2%. Since 2022, though, the Bank of Canada has rapidly increased the policy interest rate to 5% to curb inflation.
Higher interest rates have resulted in a meaningful correction in many stocks, including some high-multiple growth stocks that didn’t have sufficient earnings to support the high valuation and some stocks with high debt levels.
Here are a couple of stocks that appear to be safe to invest in, in a rising rate environment.
A podcast posted on the Mawer Investment Management website this month explains it well. It talked about how property and casualty (P&C) insurance companies could benefit from higher interest rates. P&C insurance businesses typically have two core earnings streams: interest income and investment income, and underwriting profit. They collect premiums from customers, often invest in shorter-term bond portfolios, and therefore, get to reinvest at higher rates when these bonds mature.
One P&C insurer on the TSX you can investigate is Intact Financial (TSX:IFC). Sure enough, unlike the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, which is down approximately 9% since 2022, Intact Financial stock has appreciated north of 20%.
IFC and XIU data by YCharts
Intact Financial has a track record of achieving decent returns on equity. For example, its five-year return on equity is north of 13.5%. In the last 12 months or so, the dividend stock has been resilient and essentially traded in a sideways range.
At $198.44 per share at writing, it trades at a discount of about 11% from the 12-month analyst consensus price target according to TMX. So, it offers a bit of safety from the valuation, and it benefits from higher rates. The stock also offers a dividend yield of 2.2%.
Alimentation Couche-Tard (TSX:ATD) is another stock that has been doing well in a rising interest rate environment. Since 2022, the stock has climbed about 39% versus the Canadian stock market decline of about 9%. To be sure, Couche-Tard stock appreciated about 27% over the past 12 months versus the market rise of about 2%.
The global convenience store consolidator, with many locations offering roadside fuel retail, is a highly defensive business. In the past 20 years, its earnings per share only dropped by about 1–2% over four years. In the other years, the popular retailer experienced earnings growth – often double-digit growth.
Although Couche-Tard has debt on its balance sheet, it can easily service the debt with tonnes of cash flow generation. Its long-term debt-to-capital ratio is about 39%. It maintains an investment-grade S&P credit rating of BBB+. Its trailing 12-month (TTM) interest expense was US$311.3 million, down from fiscal 2020’s US$326.7 million. So, in the TTM, it actually lowered its interest expense versus in the lower interest rate environment of 2020.
Couche-Tard’s dividend yield of about 0.76% is small, but it has been able to healthily increase its dividend at an extraordinary rate. For your reference, ATD stock’s 15-year dividend growth rate is approximately 23%.
In a rising interest rate environment, Intact Financial and Couche-Tard are both good businesses to be invested in. Investors can consider buying shares on weakness.