Going long in this volatile market can be stressful. You might be able to reduce that stress if you invest in companies with no debt, particularly if they are performing well in other areas. 

Direct Competition Impact

After keeping interest rates at record lows for years, the Federal Reserve has raised the rates three times in 2018. Economists consider it a sign that the economy is doing well because unemployment is low, economic growth is strong, and inflation is relatively stable. The federal funds rate is now in the range of 2% to 2.25%. The rate helps determine rates for mortgages, credit cards and other consumer borrowing. In addition, there may be another hike in December 2018. In 2019, three more rate hikes will be necessary and another in 2020, according to federal officials. 

Many companies are undergoing a deleveraging process for many companies, which is bad news. However, for companies with no debt is is good news. For example, take three companies in the same industry, Company A, Company B and Company C. Company A and Company B took advantage of low record-low interest rates to fuel top-line growth and/or to buy back stock to boost the company’s share price. The eventuality is that these companies must allocate more capital to pay off debts or risk insolvency. Paying off debt is obviously the lesser of two evils. (Read: How Interest Rates Affect the U.S. Markets.)

If Company A and Company B are allocating more capital to debt repayment, then they are allocating less capital to capital expenditure, or CapEx. This, in turn, will make them less competitive and increase market share for Company C, which has no debt to deleverage. Company C might not reap the rewards immediately because deflation tends to bring almost everything down with it, but it will weather the storm better than its peers and come out stronger on the other side. Keep this in mind when you look at the stocks below. There are no guarantees that these companies will experience market share gains, but they have a better shot at gaining share than some of their peers. (For more, see: How Interest Rates Affect the Stock Market.)

No Debt Concerns

A stellar balance sheet is indeed a positive, but it is unwise to consider just one metric. The following metrics as of the end of 2017 have been included in the chart below: cash position, one-year stock performance, operating cash flow (over the past year), dividend yield, revenue and net income. A strong cash position combined with no debt adds value, which is why a company will look more appealing to potential acquirers.

For one-year performance, seeing a gain in a volatile market is a positive, but when it comes to investing in no-debt companies, it is more of an investment than a trade. For operating cash flow, seeing strong cash flow generation is a positive when combined with plenty of cash and no debt. This makes for a fiscally healthy company. Dividend yield has been included. Since these companies have no debt and generate strong cash flow, the dividends should be safe. For revenue and net income, if the company has showed consistent gains over the past three fiscal years, you will see a “Y.” If the company has not shown consistent gains over the past three years, you will see an “N.” (For more, see: Introduction to Fundamental Analysis.)

 

Cash Position

1-Year Stock Performance

Operating Cash Flow

Dividend Yield

Revenue

Net Income

SEIC

$747.75 million

-16.73%

$397.53 million

1.11%

Y

Y

DOX

$649.61 million

-4.6%

$636.11 million

1.60%

Y

Y

EXPD

$1.05 billion

10.24%

$488.64 million

1.38%

N

N

NHTC

$17.8 million

57.97%

$26.61 million

2.66%

N

N

PAYX

$358.2 million

-1.91%

-$679 million

3.49%

Y

Y

FIT

$341.97 million

-24.67%

N/A

N/A

N

N

ISRG

$648.2 million

29.74%

$1.14 billion

N/A

Y

N

MNST

$528.62 million

-9.77%

$987.73

N/A

Y

Y

GRMN

$891.49 million

-19.91%

$660.84 million

3.45%

N

Y

TROW

$1.9 billion -0.10% $1.94 billion 2.96% Y N

The Bottom Line

If you are looking for a company with no debt and one that pays a dividend and has delivered consistent revenue and net income growth over the past three fiscal years, you might want to begin your research with SEIC, DOX, and PAYX. (For more, see: The 5 Fastest Growing Companies in the S&P 500.)

Dan Moskowitz owns shares of FIT. He doesn’t have any positions in any of the other stocks mentioned in the article.