This week saw the departure of Sir Charlie Bean, Deputy Governor of the Bank of England, and in his final interview he stated that the ‘new normal’ interest rate could be as low as 2.5%.
Part of the reason for this is the vast amount of borrowing that UK businesses and individuals currently have, as well as the economy’s sluggish response to the credit crunch, which together mean that an ‘old normal’ rate of 5% may be a long way off.
With that in mind, here are five shares that could benefit from continued low rates.
GlaxoSmithKline
The last few years have been tough for savers, with savings rates being very low. The ‘new normal’ rate of 2.5%, although better, remains relatively unattractive. So shares that offer both a high yield and impressive dividend growth prospects could turn out to be winners.
One such example is GlaxoSmithKline (LSE: GSK). It currently yields 5.2% but its highly attractive drug pipeline means that long-term profitability prospects are very encouraging. As a result, GlaxoSmithKline’s dividend per share could increase at a brisk pace and make the shares more highly demanded, which could also help the share price to head northwards.
British American Tobacco
One beneficiary of low interest rates are companies with high debt levels. Such a company is British American Tobacco (LSE: BATS), which currently has a debt to equity ratio of 176% — in other words, for every £1 of equity, the business has £1.76 of debt.
Although this seems high, the stability of British American Tobacco’s revenues makes it manageable, while a low interest rate should help to reduce interest charges, thereby increasing company profits. As with GlaxoSmithKline, a yield of 4.2% should also lead to buoyant demand for shares in the company.
The Retail Sector
Clearly, under ‘new normal’ conditions of low interest rates, there is less incentive to save and more incentive to spend. Therefore, retailers such as Sports Direct (LSE: SPD), Marks & Spencer (LSE: MKS) and Debenhams (LSE: DEB) should stand to benefit.
Certainly, Sports Direct is the best performer of the three at present, with the company set to report five consecutive years of earnings growth next year. It also remains attractive when its valuation and growth potential are taken into account, with a price to earnings growth (PEG) ratio of just 0.7 providing evidence of this.
Meanwhile, Debenhams and Marks & Spencer continue to struggle with their respective top-lines. The turnaround story at Marks & Spencer has disappointed many investors, but progress is being made, albeit slowly and its shares continue to offer strong income — a 4.1% yield — and good value — a price to earnings (P/E) ratio of 12.7 — at current levels.
Although shares in Debenhams have fallen heavily over the last six months, it too has potential. Recent news included Sports Direct and Costa Coffee concessions within stores, as well as a renewed focus on the company’s multi-channel offering and international expansion. Trading on a P/E of just 9.3, its shares offer great long-term value.
