2 stocks to buy ahead of an interest rate cut

On Wednesday, the Australian Bureau of Statistics (ABS) released inflation data for the June quarter, revealing that Australia’s headline inflation rose 0.4%. The figures revealed that headline inflation grew at its slowest rate of growth since the 1999 June quarter — an annualised rate of 1%.

Of concern, however, was Australia’s underlying inflation numbers (which is the Reserve Bank of Australia’s (RBA) preferred measure). Underlying inflation for the June quarter increased 0.5%, representing an annual growth rate of 1.7%. This places it below the RBA’s core inflation target of 2-3% leaving economists and market commentators calling for another rate cut when the RBA meets for its monthly interest rate meeting next Tuesday.

An interest rate cut next Tuesday would take Australia’s cash rate to an all-time record low of 1.5%, forcing investors to turn to high-yielding stocks for income. Stocks which would benefit from a rate cut include Australia and New Zealand Banking Corp (ASX: ANZ) and Telstra Corporation Ltd  (ASX: TLS).

Two other stocks which I believe should do well are SEEK Limited (ASX: SEK) and Sydney Airport Holdings Ltd (ASX: SYD). For the following reasons:

SEEK Limited

SEEK is not your conventional yield stock given it currently trades on paltry yield of 2.3%. Nevertheless, the reason SEEK is on my radar in the event of a rate cut is its exciting growth prospects.

The pioneer of online recruitment marketplaces is on track to deliver $195 million profit in its 2016 financial year and is expected to generate $215 million to $220 million of net profit after tax in 2017 (before significant items).

Although SEEK’s FY17 forecast result represents a slowdown from prior year growth rates, management’s investment into foreign markets through its stakes in US-listed Zhaopin and Brazil Online (amongst others) demonstrates its long-term growth ambition.

With the aid of an improving domestic jobs market, assisted by a further rate cut, I believe SEEK should be able to deliver growing dividends for years to come.

Sydney Airport Holdings

Sydney Airport has been touted as a “bond proxy” in recent times, given its solid distribution yield and long-term earnings certainty.

Its stapled securities command lofty valuations which the market appears to be justifying through the company’s monopoly position as Sydney’s only airport operator and a lack of alternative “safe” income options.

Nonetheless, I believe Sydney Airport is a good stock to buy if interest rates drop further. This is because a further rate cut by the RBA would place downward pressure on the Australian dollar, stimulating inbound international tourism (as it becomes cheaper to travel to Australia).

As Sydney is Australia’s most (internationally) visited city, increased tourism would augur well for traffic numbers, driving earnings higher. This in turn should result in increased distributions in the long term.

Foolish takeaway

In the event of a rate cut next Tuesday, I believe investors are better off buying blue-chip companies with the prospects of earnings (and dividend) growth like SEEK and Sydney Airport.

Although both stocks trade on relatively low dividend yields (compared to other “dividend stocks”), SEEK and Sydney Airport offer investors the potential of sustainable long-term growth at the cost of short-term income.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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