5 Low-Debt Stocks that Promise Steady Returns

With an uncertain market scenario and speculations rife over a rate hike by the Fed, companies with a low debt level are undoubtedly the safest bets.

Upbeat domestic economic data coupled with 242,000 job additions in Feb 2016, easily surpassing the consensus estimate of 194,000, have lifted the U.S. GDP growth estimate by 1%. Meanwhile, such a bullish economic backdrop might encourage an interest rate hike.

In case of a sudden raise in rates, companies with a higher debt burden will face the brunt as it will escalate the company’s borrowing costs and deplete its cash reserves.

Over the last three months, both the S&P 500 and the Dow Jones Industrial Average have gained 1.4% and 2.03%, respectively, indicating irregular stock movement. Hence, picking stocks with low debt levels will certainly help investors safeguard their portfolios in the wake of the market uncertainties.

Benefits of Low Debt Levels

Expansion: A favorable debt position allows companies to set aggressive expansion goals through the execution of mergers and acquisitions as it can borrow enough cash from the market while keeping its cash reserves intact. Moreover, a strong balance sheet will encourage the company to accelerate capital expenditure thereby driving market traction.

Shareholders Value: A low debt position implies reduced interest payment and cash position strength. Thus, the availability of excess cash with the company helps in enhancing shareholders’ value through dividend hikes and share repurchase plans.

Mitigates Risks: Investing in companies with a higher debt burden is likely to be a risky venture. During phases of economic downturn, a company having debt-free or low-debt balance sheet always reduces the chances of bankruptcy.

However, a lower debt to equity ratio indicates that a company is highly dependent on equity as a source of financing. Moreover, debt, as a source of financing, tends to be cheaper than the cost of equity.

5 Stocks to Buy

Based on the Zacks Stock Screener and our style score system, we have selected stocks with a Zacks Rank #1 (Strong Buy) along with Growth Style Score and VGM score of ‘A’ and debt/equity ratios of less than 0.1. Moreover, positives like an improved dividend yield and strong cash position stemming from lower debts holdings have also been taken into consideration while picking the stocks.

Our first pick is American Eagle Outfitters, Inc. (AEO - Analyst Report) – a company engaged in the designing and marketing of casual clothing. American Eagle Outfitters provided a favorable guidance for the first quarter of fiscal 2016. Meanwhile, the company plans to drive omni-channel growth and enhance global traction which will most likely augment its business prospects worldwide. The above mentioned factors truly reflects the stock’s potential.

At present, the company holds debt/equity ratio of 0 and exited fiscal 2015 with nearly $410 million of cash and equivalents. Moreover, it has an annual dividend yield of 3% which further underlines the stock’s potential.

Another safe pick at the moment would be American Public Education, Inc. (APEI - Analyst Report) – an online provider of higher education, focused primarily on serving the military and public service communities. The company has adopted a geographical approach to marketing, which focuses on using cost-effective channels and aims to reach out to students who are more likely to succeed, thereby improving the quality mix. The company has also launched mobile apps.

Strong cash position coupled with debt free balance sheet will continue to boost the company’s expansion goals. The company exited fiscal 2015 with $105 million cash with a debt/equity ratio of 0.

Next, Superior Industries International Inc. (SUP - Analyst Report) is one of the world’s largest designers and manufacturers of cast aluminum road wheels for the automotive industry. The company is poised to benefit from its cost-control strategies, investment in growth opportunities and share repurchases. Superior Industries’ product portfolio has been designed to suit the current market trends. According to IHS projections, the company believes to increase North American Light Vehicle production by approximately 4% to 18.2 million units in 2016.

The company’s cash position at the end of 2015 stood at $66 million in cash with a debt/equity ratio of 0 and a dividend yield of 3.23%.

Another attractive pick is Insperity, Inc. (NSP - Snapshot Report) – a company engaged in providing an array of human resources and business solutions. The company exited 2015 with $105 million in cash with a debt/equity ratio of 0 and dividend yield of 1.71%.

Last but not the least, Thor Industries Inc. (THO - Snapshot Report) manufactures a wide range of recreational vehicles (RVs) at various manufacturing facilities in Indiana and Ohio and sells its products through independent dealers in the U.S. and Canada. An improving economic scenario coupled with lower fuel price will continue to drive growth for the company. The company ended fiscal 2015 with cash and cash equivalent of nearly $183 million cash with a debt/equity ratio of 0 and a dividend yield of 1.93%.

Bottom Line

Features like low debt, a solid cash position, higher dividend yield and compelling prospects make these five stocks great picks for a winning portfolio.