With US interest rates set to rise imminently, the indebtedness of utility companies such as Pennon (LSE: PNN) is likely to come under the spotlight. Thats because as interest rates begin their rise the cost of servicing debt will inevitably increase and cause profitability and dividends to potentially come under a degree of pressure. As such, Pennons share price performance in the short run may be somewhat disappointing.
However, over the longer term Pennon remains a very appealing buy at the present time. Thats because it offers a yield of 4% in the current financial year which is expected to rise to 4.2% next year due to strong dividend growth. And, while interest rates are likely to rise moving forward, their pace of increase is unlikely to be anything but pedestrian since inflation remains stubbornly low. As such, Pennon may continue to be popular in 2016 and beyond as its dividend appeal remains high.
Moreover, with the global economic outlook still being decidedly uncertain, infrastructure companies such as Pennon are likely to remain enticing to potential suitors. Therefore, as well as bright income prospects, there is real bid potential for UK based utility companies such as Pennon.
Also likely to be under the spotlight due to a rise in US interest rates is Glencore (LSE: GLEN), with the company still having a significant amount of debt even after its $10bn placing. In fact, Glencore had around $31bn of debt prior to the placing and, with it having a market capitalisation of $13bn, it is clear to see that the market could easily become concerned about Glencores long term outlook.
Of course, Glencore has suffered greatly from a hugely challenging commodity market and, realistically, things could get worse before they get better in this space. For example, coal prices continue to come under pressure from increasing supply and this trend could continue into 2016. And, while Glencores shares have already fallen by 70% in 2015, further weakness could lie ahead especially with the companys bottom line due to fall by 57% this year.
That said, Glencore is expected to post a turnaround next year, with earnings due to rise by 17%. This puts it on a price to earnings growth (PEG) ratio of only 0.9, which means that it could hold appeal for less risk averse investors.
Meanwhile, online takeaway ordering service Just Eat (LSE: JE) is unlikely to be impacted by interest rate rises since at the end of 2014 it had next to no debt on its balance sheet. Looking ahead, its bottom line growth rate is set to be exceptionally high, with the popularity of fast food expected to continue growing in future years. In fact, Just Eats earnings are expected to be 38% higher this year and then a further 59% greater next year.
This rapid rate of growth puts Just Eat on a PEG ratio of only 0.8, which indicates that its shares could be set to continue the run which has seen them soar by 48% this year. And, with Just Eat having excellent geographical diversity, it could prove to be a relatively resilient business with bid potential.
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Peter Stephens owns shares of Pennon Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
