With equities finally on the rise, investors across the country are on the hunt for the best stocks to buy now. The FTSE 100’s climbed 13% since the start of the year, including dividends, almost doubling its typical historical annual average.
Seeing such performance in the wake of the market downturn in 2022 is a welcome change of pace. And with the deputy governor of monetary policy, Ben Broadbent, announcing that a summer interest rate cut was possible, even more growth could be just around the corner.
That’s terrific news for many businesses, but especially for Rolls-Royce (LSE:RR.), which is already among the top-performing large-cap stocks on the London Stock Exchange. Let’s explore why.
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Lower rates, cheaper debt
It was only a few years ago that a serious debate was going on relating to whether Rolls-Royce could potentially implode under its massive debt load. The pandemic proved to be an absolute disaster for this business, with around half of its top-line income evaporating.
Today, such concerns are a thing of the past. Thanks to new and prudent leadership, the company’s undergone a rapid, radical change that’s restored profitability and free cash flow generation. After years of lacklustre performance, Rolls-Royce has quickly begun climbing back up the ladder within the FTSE 100. And since the start of the year, the engineering giant’s market-cap has increased by an impressive 50.4%.
However, while the cracks in the balance sheet are slowly being filled, debt remains a significant burden for this enterprise. As of December 2023, £5.76bn of loans and lease liabilities are still outstanding. And that means a significant chunk of operating earnings is being used up to service these liabilities.
However, when interest rates start to fall, eliminating this leverage becomes far easier. Not just because debt’s cheaper. But also because customers will also be able to secure cheaper financing, leading to an increased probability of new larger orders, bolstering Rolls-Royce’s cash flows even further.
The best pick?
Finding the best investment within the FTSE 100 today isn’t always straightforward. Rolls-Royce certainly appears to be on track to deliver some of the best stock performance this year. However, as previously pointed out, the company still has a lot of challenges to overcome. And this added risk may not be everyone’s cup of tea.
Since every investor has different risk tolerances, objectives, and timeframes, pining down the best stocks to buy ultimately depends on the individual. However, Rolls-Royce may not be a bad place to start searching.
The global travel market’s almost made a complete recovery from the pandemic, with current consensus indicating it will continue to grow. Meanwhile, a growing number of international conflicts provides a catalyst for the group’s Defence segment. And investments being made into small modular nuclear reactors could position the firm as a future titan in the energy industry.
Of course, competition remains a prevalent threat. So like all investments, there are never any guarantees.
