"The plummeting price of oil and surging U.S. dollar are increasing growth throughout the world," according to a poll conducted by Bloomberg. In the poll, about 75% of investors, analysts and traders said oil's 50% drop will contribute to worldwide expansion. Then, nearly 60% said dollar strength against other currencies will be beneficial. This is probably true, but we really should be thinking about what stocks in particular will benefit from the current environment. I went hunting for two US-based stocks standing to benefit from lower oil prices, a strong US consumer, and/or steady interest rates.
The first stock I bought is Kraft Foods Inc (KRFT). As a consumer staple, the company will benefit from extra consumer spending derived from lower oil pricing. With nearly ~90% of revenues stemming from US sales and only ~10% from Canada, the company has little currency exchange issues or other problems relating to emerging markets, making it a stable company. With respect to lower oil pricing, the company will save on shipping and packaging input costs. In this instance we are disappointed the urban legend of Kraft's "plastic" cheese is just that, an urban legend, so the company won't be saving on costs there.
But benefiting from the current economic environment is just one sail on this company's mast. Kraft has increased the dividend 10% over the last 2 years, and it seems like the fun is just beginning for this 3.35% yielder. The company has a new CEO, John Cahill, who is looking to "accelerate change" at the company.
On 12/17/13, the Board authorized a $3 B share buyback. Since then, management has purchased $524 M of shares, therefore $2.476 B is remaining, which good for over 6% of the current market cap. Since this program began, the company seems to like buying in the mid to upper $50s, which should offer a safety net of sorts for investors:
Another solid holding is New York Mortgage Trust Inc's (NASDAQ:NYMT) Cumulative Redeemable Preferred shares, symbol NYMTP. For starters, let's examine the underlying company. The company invests in mortgage related and financial assets and targets multi‐family CMBS, distressed residential mortgage loans, Agency RMBS, and Agency IOs. The company is primarily focused on NY, NJ, Connecticut, Florida, and Texas markets.
Obviously considered a REIT, the company is naturally tied to interest rate risk, however, management has it covered with hedges incase of any volatility. In the recent 10-Q, management outlines how a change in rates will increase changes in net income, which is designed to offset portfolio values for a more stable response to any change:
Like any other REITs, the company is far from immune. However, management seems well prepared for the upcoming increase in rates, and despite this anticipated move, interest rates have stayed stagnant for quite some time. In addition, their heavy exposure to multi family dwellings are quite appealing, considering a strength in consumers will probably diminish tenant defaults and late rents. Overall, I'd consider this company healthy and very well managed, and a good situation in the current environment.
The cumulative preferred issue is trading just below redeemable value of $25/share, and is redeemable no sooner than June 4, 2018. Since shares are trading around $24, there is an extra 4% of value inherent in shares if the company redeems. As this date approaches and after as well, I expect shares to trade at or above par value due to conversion possibility.
Another positive and something I always look for in preferreds is these are cumulative, which means any unpaid dividends must be paid first for the common shares to commence paying theirs, or for the shares to be redeemed. At a 7.75% dividend rate at par value, this holding, while riskier than some others since it cannot achieve the same share price appreciation, is still worthy of consideration as it does wonders for diversification. This issue are also much lower risk than the common shares by virtue of preferred status. I am not a tax professional, but my accountant tells me REIT dividends aren't taxable in an IRA, which makes NYMTP a perfect addition to this portfolio.
Kraft is a great company with strong brands, it's in a great spot considering low oil and a strong US consumer. With a big buyback, growing dividend and a new CEO, what's not to like? Second, NYMP is one of the best-managed multi-family lenders in the Northeast, and in the current rate environment, they are a reasonable play. The company is well-hedged against interest rate changes, and its heavy focus on consumer-occupied properties seems appealing. By buying their 7.75% yielding cumulative convertible preferred shares below par, we are in even better shape than the common.
In consideration of the current environment, both stocks are a worth a look. Good luck.
Disclosure: The author is long KRFT.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author is long NYMT via the preferred shares mentioned