With the RBA cutting interest rates to just 2.25%, life has just got a lot tougher for savers. Clearly, there is a danger that there will be no real terms return on cash balances over the medium term, with rates having the potential to plunge below the current rate of inflation. However, Aussie investors should not despair, for lower interest rates can be a good thing – especially if you're invested in the right types of companies.
With that in mind, here are three prime examples of stocks that could help you overcome lower interest rates.
Amcor Limited
With sales to emerging markets making up around 30% of Amcor Limited's (ASX: AMC) total sales, it looks set to benefit from lower interest rates through a weaker Aussie dollar. In fact, Amcor is aiming to increase its exposure to faster growing markets outside Australia as it seeks to rejuvenate a bottom line that is currently stalling somewhat.
For example, over the next two years Amcor is forecast to see earnings fall at an annualised rate of 3.8%. While disappointing, its long term prospects are sound (which is at least partly due to its increasing exposure to emerging markets) and this means that dividends per share are expected to rise by 14.3% per annum over the next two years. As such, investor sentiment in Amcor may improve as Aussie investors seek out high quality income stocks.
Scentre Group Ltd
Shopping centre operator, Scentre Group Ltd (ASX: SCG), is expected to see its bottom line move northwards at a rapid rate. Aided by an improved consumer outlook, with lower interest rates being a major contributor, Scentre's price to earnings growth (PEG) ratio stands at just 0.4 – far less than the ASX's PEG ratio of 2.42.
In addition, Scentre also offers a top notch yield of 5.4% and, looking ahead, dividends per share are forecast to rise at twice the current rate of inflation, with annualised growth of 3.4% over the next two years being expected by the market. And, with a beta of 1.45, any boost to the ASX from lower interest rates should push Scentre's shares up at a faster rate than the wider index, with a movement of 1.45% being anticipated for every 1% change in the ASX.
Insurance Australia Group Ltd
Insurance Australia Group Ltd's (ASX: IAG) yield of 6.2% (fully franked) may appeal when interest rates are on the way down, but its price to earnings (P/E) ratio of just 12.1 indicates relative value while the ASX has a P/E ratio of 16.6 and the wider insurance sector has a much higher P/E ratio of 19.5.
Meanwhile, IAG also has an excellent track record of dividend per share growth with, for example, them having increased at an annualised rate of 31.3% during the last five years. Furthermore, its financial standing has improved in recent years, as evidenced by cash flow per share that has risen by 17.2% per annum during the last five years, which makes it an even more appealing investment right now.
