Five Low-Debt Stocks for the “Higher for Longer” Era

Posted: May 07, 2024

By John Dorfman

May 6, 2024 — (Maple Hill Syndicate) – Jerome Powell, head of the Federal Reserve, made it official a few days ago. “Higher for longer” interest rates are the policy of the nation’s central bank, and that’s likely to last for at least several months.

The cost of carrying debt is now biting companies harder than it did in the past half-a-dozen years. So it makes sense to look at low-debt stocks.

Frankly, I prefer low debt in any environment. But when borrowing money is cheap, high-debt stocks sometimes frolic. In my view, that time has passed.

Here are five companies that have little or no debt, and whose stocks I suggest for serious consideration.

Cognizant

Cognizant Technology Solutions Corp. (CTSH), based in Teaneck, New Jersey, is an information technology (IT) services provider. It provides outsourced IT services, and also consults with companies to improve their in-house tech operations.

Among the companies it serves (or has recently served) are Comcast, JP Morgan, Walgreens and Walmart. About 70% of Cognizant’s employees are in India, where skilled labor is cheaper than in the U.S.

Over the past decade, Cognizant’s revenue has climbed about 10% a year. Profits have grown more slowly, about 6% a year. The company has shown a profit every year for 26 years. Debt is only 10% of stockholders’ equity.

Incyte

A pharmaceutical company that concentrates on cancer treatment, inflammation and autoimmunity, Incyte Corp. (INCY) has been profitable in only seven of the past ten years. Usually I prefer a little more consistency, but I feel positive about this company, whose debt is only about 1% of equity.

The company develops drugs, markets some of them itself, and assigns marketing rights to others (typically with larger pharmaceutical firms). Over the past ten years, Incyte’s revenue growth has averaged 21% a year. The company has dual headquarters in Wilmington, Delaware and Geneva, Switzerland.

Mueller Industries

I’ve recommended Mueller Industries Inc. (MLI) several times in this column. It’s a metal-bender, perhaps best known for making refrigerator coils. But its product line is diverse, including such things as rods, valves, tubing and coaxial heat exchangers.

The company hails from Collierville, Tennessee, and has posted a profit in each of the past 30 years, including the recession year of 2008 and the pandemic year of 2020. Debt is only 1% of equity, and the company has more than $39 in cash for each dollar of debt.

Cal-Maine Foods

There’s no debt whatever at Cal-Maine Foods Inc. (CALM) of Ridgeland, Mississippi. It’s the largest U.S. egg producer, with roughly 20 million laying hens.

One might think that eggs would be a steady business but, alas, that’s not so. The prices that Cal-Maine can get at the grocery store vary over time, but a bigger variation is in costs. When the price of chicken food (mainly corn) rises, costs go up. Results are also affected when avian flu hits the flocks.

So, profits vary a lot from year to year. Unlike many companies, which smooth out their dividends, Cal-Maine raises its dividend in good times and cuts it in bad. Currently, the dividend yield is 3.3%. It has ranged from negligible to 11%.

Alpha Metallurgical

Yes, coal is a dying industry – for better or for worse. But it won’t die fast. U.S. energy needs continue to grow, thanks partly to power-guzzling data centers. Coal remains an important source of electrical power and is also necessary for the production of steel.

Alpha Metallurgical Resources Inc. (AMR), based in Bristol, Tennessee, mines coal in Virginia and West Virginia. The stock sells for less than seven times earnings, and the company’s debt is less than 1% of equity.

The Record

This column is the 22^nd one I’ve written about low-debt stocks, beginning in 1998.

My picks in the first 21 columns have chalked up an average 12-month return of 24.8%. That is far above the average return on the Standard & Poor’s 500 Total Return Index for the same periods, which was 11.1%.

Fifteen of my 21 sets of recommendations have been profitable, and 13 have beaten the S&P 500.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

My picks from a year ago rose 16.8%, but failed to beat the benchmark, which zoomed ahead 25.8%. My best pick was Teradyne Inc., up 32.3%. My worst was Moderna Inc., down 5.1%.

Let’s see if my new crop can make some money and beat the index.

Disclosure: I own Cal-Maine Foods shares personally and for most of my clients.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.