A hike in interest rates increases the Equated Monthly Installments or EMIs for borrowers who have taken home loans, car loans and other debt. This is pretty straightforward. However, the changes in interest rates can also have a big impact on your investments and the potential return on investment (ROI) you can generate from your portfolio. The risk-free rate, which is the yield on government bonds, is used to price all financial assets including equities. And any sharp rise or fall in yields on the government leads to a re-pricing of assets.
The interest changes are transmitted to the real economy through changes in the yields on bonds. This directly affects the interest rate that big companies, banks and government entities pay when they borrow by issuing new bonds. With time this gets transmitted to the wider economy through changes in the lending rates of banks and other lenders such as housing finance companies.
In simple words, a decline in the risk-free rate raises the value of risk assets such as equity and vice versa.
Besides, the change in bond yields affects the borrowing costs of companies, impacting their net profits and ability to invest for future growth.
In the last one-year, there has been a sharp rise in the yields on benchmark 10-year government bonds in India and other major economies such as the United States and the European Union. The rise in bond yields has been the sharpest in the United States and in due course, this will raise borrowing costs all over the world as the US dollar remains the global currency for trade and investment.
The yield on 10-year US government bonds is at around 4.8 percent now from a record low of 0.5 per cent three years ago. This has led to the re-pricing of risky assets such as equity and stock prices have declined across the world as bond yields in the US continue to scale new highs. Similarly, the yield on the 10-year government of India bonds is up by nearly 30 basis points in the last three months and nearly 150 basis points from their lows in 2020. One basis point is one-hundredth of a percent.
While higher interest rates are bad for corporate earnings and stock prices in general, not all companies in India will be affected uniformly.
In fact, higher interest rates in the bond market and bank deposit is beneficial for cash-rich companies. These companies can now earn higher interest on their cash reserves which they invest in bonds, money markets or bank fixed deposits.
Cash-rich companies also tend to be debt-free so the rise in interest rate has no direct impact on their earnings and business operations. Higher interest rates also provide a competitive advantage to cash-rich companies as their indebted competitors have a large recurring amount on servicing their debts.
Most cash-rich companies are also very generous with dividend pay-out and annual dividend income from these companies can be a good source of secondary income for investors.
Here are five best-ranked cash-rich and debt-free companies that are also great dividend payers. We have selected these companies from the universe of 500 companies that are part of the BSE500 Index. The sample excludes banks and finance companies that deal with cash and thus this analysis is not applicable to them.
1. The public sector miner Coal India is at the top of our list with cash reserves of nearly Rs 44,000 crore at the end of March this year, equivalent to a third of its assets. The stock also offers a dividend yield of 8.4 percent at its current price, nearly seven times more than Sensex companies’ average dividend yield of 1.25 percent.
2. The multinational software exporter Oracle Financial Services Software is at the second spot on our list. The company is sitting on cash reserves worth Rs 5500 crore, equivalent to nearly two-thirds of all its assets. The stock offers a dividend yield of 5.6 percent currently.
3. The Gujarat government-owned Gujarat Narmada Valley Fertilisers & Chemicals is next on our list with cash reserves of nearly Rs 10,000 crore at the end of March this year. It amounted to 40 percent of the company’s total assets. The stock also offers a high dividend yield of 4.9 percent currently.
4. The multinational lubricant maker Castrol India is next on our list with cash reserves of around Rs 1000 crore at the end of June 2023, equivalent to nearly half of its assets. The stock also offers a high dividend yield of 4.7 percent at its current stock price.
5. The cigarette maker VST Industries is the fifth company on our list with cash reserves of nearly Rs 600 crore at the end of March this year, which amounted to half of the company's assets. The stock also offers a relatively high dividend yield of 4.4 per cent at its current stock price.
(Disclaimer: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).