Rising interest rates are unhelpful for businesses. But there’s a FTSE 100 stock that I’m buying for my portfolio as the Bank of England increased rates to 3.5% this week.
The stock is Rightmove (LSE:RMV). The share price is down around 31% this year.
I see this is an opportunity to buy one of my top UK stocks while it’s out of fashion. I think that the underlying business is in good shape, so I’m looking to increase my investment at today’s prices.
Interest rates
Rising rates are bad for businesses for two reasons. They make debt more expensive and they reduce opportunities for growth.
Rightmove, however, is protected from both of these effects. First, the company has no significant debt on its balance sheet, meaning that it’s unlikely to have to refinance at higher rates.
Interest payments on its debt currently account for less than 1% of Rightmove’s operating income. And with £10.6m in total debt and £39m in cash, if the amount of interest the company had to pay increased substantially, it could probably just pay the debt off.
Second, the business also doesn’t require significant capital to grow. Over the last five years, the company has reinvested less than 1% of the earnings generated through its operations.
Despite this, the company’s earnings per share have been growing at around 6.5% per year on average. The business has been growing, it just hasn’t required significant cash to do this.
I therefore don’t think that higher rates are going to be a problem for Rightmove in terms of costs. But there’s another issue to consider.
Mortgages
Rightmove has good protection from the effects of rising interest rates. But it’s not obvious that the same can be said for its customers.
Higher rates make the cost of mortgages more expensive. The cost of a £200,000 mortgage over 25 years increases from £676 per month with rates at 0.1% to £1,002 per month at 3.5% interest.
That’s likely to cause demand for housing to slow. A slowing property market impacts Rightmove’s customers and creates a headwind for the company’s revenues.
At a price-to-earnings ratio of around 25, the stock will start to look expensive if its earnings falter. But if the share price starts to fall, management has the ability to take advantage.
Since 2018, just over two-thirds of the company’s free cash flow has been used to on share buybacks. Lower share prices allow management to buy in more stock, increasing the value of repurchases.
A stock to buy
I don’t think that the decline in the Rightmove share price is entirely unwarranted. Increased interest rates are likely to reduce mortgage demand and cause the UK property market to slow.
With a strong balance sheet and low capital requirements, I think the company is well protected from the effects of higher rates, though. That’s why I think the FTSE 100 stock can be a great investment for me.
