2 ways to profit from rising interest rates

Bank of Queensland Limited (ASX:BOQ) and Collection House Limited (ASX:CLH) could be two of the beneficiaries of higher interest rates.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The possible Federal Reserve interest rate rise decision is getting very close, it's on 14 December 2016 in the USA. This has already had an impact on stocks like Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL).

That doesn't mean this is a bad change for every single business on the ASX. There are a handful of businesses that may actually benefit from an interest rise.

Below are two companies that might get a boost to earnings because of an interest rate rise:

Bank of Queensland Limited (ASX: BOQ)

The regional bank has been one of the better performing banks over the past few years having grown its cash earnings after tax from $248 million in FY13 to $360 million in FY16. This has helped grow the regional bank's market capitalisation to $4.5 billion.

The reason why the bank may benefit is due to the margin it makes on the interest it charges customers compared to the interest it pays to its own funders. This is called the 'net interest margin', or NIM, it's one of the main drivers of profitability for banks.

In FY16 Bank of Queensland's NIM decreased from 1.97% to 1.94%, which doesn't sound like much, but when this margin is being reduced on over $40 billion, it can make a big difference.

If it can charge higher interest rates then the NIM may increase again which would increase profitability, particularly on the loans that already exist.

Bank of Queensland has been a reliable dividend payer for shareholders, having maintained or increased its dividend every year since 2009. In FY16 it grew its dividend by 2 cents per share, which represented a 2.7% growth of the dividend.

It's trading at 12x FY17's estimated earnings with a grossed up dividend yield of 9.45%.

Collection House Limited (ASX: CLH)

Collection House is one of Australia's largest debt collectors with a market capitalisation of $198 million.

A majority of its revenue is from purchased debt ledgers, but a growing portion of its revenue is being generated from collection services, such as its contract with the ATO. This division grew revenue by 20% during FY16.

Collection House seems to be on the road to recovery, with its share price growing by 55% since April 2016. It may grow even further if interest rates rise because the sad reality is a lot of people have taken on a lot of debt.

The interest rate rise could push some people into unsustainable cashflow problems and result in Collection House being paid to recover money owed, or debt ledgers may come on the market for much cheaper prices which would benefit Collection House over the long term.

Collection House is trading at 9x FY17's estimated earnings with a grossed up dividend yield of 7.77%.

Foolish takeaway

There is always an opportunity when volatility comes along and when business conditions change there will be winners and losers. Bank of Queensland and Collection House could both be beneficiaries from an interest rate change.

Out of the two I think Bank of Queensland will make the better long term investment, plus the huge dividend is a big bonus. But over the next two years, I think Collection House will provide the better return.

Motley Fool contributor Tristan Harrison owns shares of Collection House Limited. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »