Low-debt companies have greater financial flexibility to invest in future growth opportunities and raise dividends. With fears that a ‘Grexit’ could lead to tightening access to credit, now may be the right time to switch into low-debt shares.
Vodafone
Having sold its 45% stake in Verizon Wireless back in 2013, Vodafone (LSE: VOD) is much less indebted as its European peers. The company has net debt of £22.3 billion, which is 1.9x EBITDA.
However, Vodafone’s free cash flows are very poor and its earnings continues to decline, as price competition in Europe continues to intensify. This means that its dividend is largely funded through increases in debt.
In the longer term, though, Vodafone’s Project Spring capital investment strategy could pay off. On top of this, a potential deal with Liberty Global could bring in huge synergies, particularly in the UK and Germany, where there are geographical overlaps.
Shares in Vodafone have a forward dividend yield of 4.9%.
Burberry
Burberry (LSE: BRBY) is a fast growing but mature brand, which means the company is able to generate substantial free cash flows as it no longer needs invest so much in new stores and infrastructure. Net cash at the end of March 2015 was £552 million.
A strong US dollar will hold back growth in earnings in the medium term, with analysts forecasting earnings will only grow by 3% this year, which implies a forward P/E of 20.4. But as its cash pile continues to grow, Burberry is in a very strong position to lift its payout ratio. Its shares currently yield just 2.2%.
Travis Perkins
Travis Perkins (LSE: TPK) has net debt of only £375 million at the end of 2014, which gives it a net debt to EBITDA ratio of just 0.7x. The company does have substantial property lease rental commitments though, which means its lease adjusted net debt to adjusted EBITDAR is 2.8x. But its dividend is covered by 3.1x earnings, and its shares currently yield 1.8%.
The building and home improvement supplier should continue to benefit from stronger home improvement sales and increased construction activity in the UK. With expectations of adjusted EPS growth of 12% this year, Travis Perkins has a forward P/E of 16.3.
Ashmore
Ashmore’s (LSE: ASHM) focus on emerging markets led to significant net outflows for the fund manager over the past year. Assets under management are estimated to have fallen by 4.1% in the first three months of 2015 to £61.1 billion. However, with emerging markets nearing the bottom of the cycle, and the fund manager expanding focusing on frontier markets, investor appetite should improve in the longer term.
Analysts expect Ashmore will see earnings rise 9% in this year, which implies a forward P/E ratio of 14.5. In addition, Ashmore trades at a forward dividend yield of 5.6%, and the company has no net debt.
Pets at Home
Pets at Home (LSE: PETS) reported revenues grew by 9.6% to £729.1 million in 2015. Service revenue, which grew by 25.2%, was particularly strong because of higher fee income from veterinary practices and strong demand for pet grooming services and nutritional advice.
Pets at Home has also done well to expand its loyalty programme, VIP Club, to 3.2 million members (from 2.0 million last year). The loyalty programme should help the company to encourage pet owners to visit more frequently and cross-sell different products and services.
With 2015 EPS of 13.5 pence, Pets at Home shares are now valued at 20.8 times its earnings, with a dividend yield of 2.2%. Analysts are optimistic on the growth prospects of the company, particularly because spending on pets by UK consumers is expected to grow further. Net debt for the company was £192.0 million, which represents a leverage ratio of 1.6x underlying EBITDA.