The debate is on over whether or not Jerome Powell and the Federal Reserve’s FOMC will lower interest rates sooner rather than later. Some pundits and investors had been calling for a June rate cut, but the more definite dates were looking like July, September, October, and December, and would there be one or two interest rate cuts.
Whenever you think rates will be cut, the CME’s own FedWatch Tool is calling for lower interest rates by over a 63% chance at the July 29 FOMC announcement and nearing a 50% chance for a second rate cut to occur at the FOMC’s mid-September or late-October announcement.
While predicting the “when” rates get cut is harder to do than predicting by “how much” and “over what time period,” there are many companies that will benefit from an environment of lower interest rates. Too many companies could be named, but 24/7 Wall St. has tracked down the leadership position of each sector to see when and where investors can look for a win from lower interest rates in the coming months and/or into 2020.
It is important to understand that many businesses may get help from lower rates, but a continued slowing economy and continued trade war pressure from China and the slower global growth that is expected may offset the gains from Federal Reserve interest rate cuts. This is also at a time when Europe has been forced into being even more dovish, and negative interest rates are still more common than not in Japan and in Europe’s top economies where quantitative easing continues.
24/7 Wall St. has selected 8 primary targets, and named back-up targets behind some of them, which would likely see a direct benefit from a lower interest rate environment in the United States. Some of these might not be the first names you think of, but the slower growth story and cyclical nature of many businesses will likely mean that many other historical would-be beneficiaries of interest rate cuts might not get that much help until long after the rate cut cycle has begun. Special attention has also been given around income sensitivity, debt loads and how dividends may look as interest rates fall.
AT&T Inc. (NYSE: T) may have a more difficult business model to understand versus the past when it was solely a defensive telecom. As one of the top two wireless players, AT&T is now a conglomerated roll-up after having acquired DIRECTV and Time Warner. Its 6.3% dividend yield also looks more attractive for income investors if interest rates are going down rather than going up for a relative yield basis.
Of AT&T’s total $353.4 billion in liabilities, it has a whopping $185 billion in long-term debt and another $104 billion of “other liabilities” also classified under longer-term obligations. AT&T rival Verizon comes with a lower dividend yield because it is a more focused business and its shares have held up better. While it will also win from lower rates it has a less leveraged balance sheet than AT&T.
The Bank of New York Mellon Corporation (NYSE: BK) has already warned that a flat or inverted yield curve is impacting its margins. It is the top custodial bank of them all and it derives a substantial amount of income from interest spreads. BNY/Mellon had $34.5 trillion in assets under custody and/or administration as of March 31, 2019. The group also just won the $130 billion Treasury asset management contract of Microsoft since the end of the last quarter.
BNY/Mellon rival State Street and other custodial banks are set to see share prices rise when (if) the yield curve gets back to normal. The custodial and trust bank holds massive amounts of deposits similar to rival BNY/Mellon. Discount brokers like Schwab and E*TRADE also win when yield curve normalization allows for a spread on what they earn on customer deposits versus what they have to pay customers to hold cash.
Berkshire Hathaway Inc. (NYSE: BRK-A) should be a beneficiary of lower interest rates, It can borrow cheaper money, it has industrial exposure, insurance exposure, and is an energy and utility owner. It also owns many banking and financial equities that should win as the yield curve normalizes. Warren Buffett’s company is also a key cyclical conglomerate that has a $500+ billion market cap, and Buffett would rather use that $100+ billion cash pile to make a big acquisition rather than worry if he is collecting 0.25% or 0.50% lower interest income from the banks.
Berkshire Hathaway also recently hit a high of $93 billion in long-term debt and carries another $170 billion in “other liabilities” which are classified under longer-term rather than current liabilities.