In the current environment, interest rates are rising while inflationary pressures are mounting due to spiking commodity prices and other inputs, including labor and freight.
Higher interest rates can have differing impacts on different groups of stocks. The most prominent impact is a lower equity risk premium. This is the premium investors are willing to pay for stocks, which are riskier than Treasurys.
When Treasury yields are low, investors will pay higher valuations for stocks because the alternative is extremely low yields in risk-free Treasurys. The opposite is true as well. When Treasurys yield more, investors are generally willing to pay less for stocks and the higher risk they carry. This results, all else equal, in lower stock valuations, which brings stock prices down.
However, there are certain sectors of the stock market in which rising rates create tailwinds for earnings. In this article, we’ll take a look at three dividend stocks we think can do well in a rising-rate environment.
Aflac Incorporated (AFL)
Our first stock is Aflac (NYSE:AFL), a company that provides supplemental health and life insurance products, mostly in the United States. Aflac is a full-line insurance provider for various types of disability, critical illness, dental, vision and other non-medical types of insurance.
The company was founded in 1955. It generates about $20 billion in annual revenue and has a current market capitalization of $42 billion.
Aflac, like other insurers, stands to benefit from higher interest rates because insurers collect premium from customers and then invest those premiums, which is referred to as float. In other words, insurers take premium that doesn’t need to be paid out yet and invests it to generate interest and dividend income until there are claims to be paid.
Insurers tend to invest fairly conservatively, and for good reason, so they tend to be sensitive to prevailing market interest rates. Aflac, for instance, had $133 billion of investment securities at the end of 2021, with substantially all of that in interest-generating securities. For the year, that $133 billion in investments generated almost $4 billion in investment income, so the scale here is sizable to say the least.
On Aug. 1, Aflac announced second-quarter results for the period ending June 30. For the quarter, the company reported $5.17 billion in revenue, a 2.8% decline compared to Q2 of 2022. However, revenue was $700 million higher than expected. On an adjusted basis, earnings per share (EPS) equaled $1.58 versus $2.16 in the year-ago period. Adjusted book value increased 11.5% to $46.61 per share.
Share buybacks will also boost Aflac’s EPS growth. Aflac repurchased 10.5 million shares at an average price of $66.67 during the most recent quarter. The company has 95.8 million shares, or 16% of its outstanding share count, remaining on its repurchase authorization.
The dividend payout ratio will likely be just under 30% for 2023, which indicates a safe dividend. AFL stock currently yields 2.2%.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) has grown into a global banking behemoth with a market capitalization of $386 billion. It has annual sales of nearly $130 billion. The firm competes in every major segment of financial services, including consumer banking, commercial banking, home lending, credit cards, asset management and investment banking.
JPMorgan posted third-quarter earnings on Oct. 13. Results were much better than expectations on both the top and bottom lines. EPS came to $4.33, which was 39 cents better than estimates. Revenue soared 22% year-over-year to $39.9 billion, which beat consensus by almost half a billion dollars.
Provisions for credit losses were $1.38 billion, well off the estimate of $2.52 billion and down sharply from $2.90 billion in the second quarter. Net interest income was $22.7 billion, about $400 million better than expected and up from $17.5 billion a year ago.
Revenue growth is challenging. However, the company will receive a boost from the sizable share buyback program, which has been restarted following a temporary suspension in 2022. JPMorgan’s balance sheet and earnings potential are more than sufficient to produce a tailwind from repurchases indefinitely, but its leverage to the credit card market may keep a lid on profitability going forward, in addition to rising expenses.
Credit costs have begun rising in a meaningful way, which is another headwind to earnings in the quarters to come but reversed in Q3. JPMorgan has been able to navigate a tricky rate environment and produce strong returns, and we expect that will continue
JPMorgan currently yields 3% and has raised its dividend for 12 consecutive years. It has a projected payout ratio of 25% for the year.
Enterprise Bancorp (EBTC)
Enterprise Bancorp (NASDAQ:EBTC) was formed in 1996 as the parent holding company of Enterprise Bank and Trust Company, referred to as Enterprise Bank. It has 27 full-service branches in the North Central region of Massachusetts and Southern New Hampshire. The company’s primary business operation is gathering deposits from the general public and investing in commercial loans and investment securities.
The bank offers commercial, residential and consumer loan products, cash management services, electronic banking options, insurance services, as well as wealth management. About half of the company’s loan portfolio is in commercial real estate. About a third is in commercial construction loans.
Other subsidiaries under Enterprise Bancorp are Enterprise Investment Services and Enterprise Insurance Services, which cater to the bank’s target market of business customers. Enterprise Bancorp is an exceptionally managed bank. It has remained profitable in every single quarter since its formation.
In the 2023 third quarter, revenue of $43 million declined 3% year-over-year. EPS came to 79 cents. Net interest margin (non-GAAP) was 3.46%. Total loans increased 2% compared to June 30, 2023, and 9% compared to September 30, 2022. Total deposits decreased 0.4% compared to June 30, 2023, and 2% compared to September 30, 2022.
Moreover, thanks to its strong business outlook, Enterprise has raised its dividend by 12% this year. The company has increased its dividend for 29 consecutive years and yields nearly 3%.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
