Zero or low-debt stocks have gained popularity recently as they avoid additional financial costs associated with debt servicing. Companies without interest payments on loans have more funds to return to shareholders, potentially leading to higher stock prices. This is separate from the advantage of being more insulated from market fluctuations since there is no constant drain on company finances. Therefore, low debt is one trait that many defensive investors consider when buying stocks.
While the Federal Reserve is expected to cut interest rates once or twice this year, rates are forecast to remain elevated for a little longer, significantly higher than pre-pandemic levels. This could mean zero or low-debt stocks continue trading at a premium for an extended period. Analysts in this scenario are focusing on companies with substantial cash reserves and little to no debt, able to sustain dividend payments even if rates stay high or economic issues emerge.
Typically, highly cash-generative companies carry low debt since there is minimal need to take on obligations to expand. This enables some low-debt firms to achieve high returns, making them particularly suitable for the current investment environment.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) designs and develops robotic surgical assistance systems all while it carries no debt. As a healthcare organization with technology at its core, Intuitive Surgical unveiled its latest product in April, the da Vinci 5 system. Industry experts praised it for being groundbreaking in its field, with investors clearly welcoming these developments. ISRG stock has risen over 26% to record highs since the beginning of the year, with 17% of the gains since April.
Where Intuitive Surgical differs is in its substantial financial reserves. While many technology firms utilize cash reserves quickly, Intuitive has $7.3 billion available even as earnings and EPS grew over 50% in the past year alone. This impressive performance is reflected in Intuitive’s valuation, trading at a relatively high price-to-earnings (P/E) ratio of 76.9x. Yet, it does not currently offer a dividend to shareholders. However, given strong results and significant cash holdings, initiating a dividend is a possibility as the business continues to grow its portfolio.
Meta Platforms (META)
Indeed, Meta Platforms (NASDAQ:META) has invested heavily in artificial intelligence (AI). Also, it offers compelling advantages to investors seeking low-debt stocks.
It generates substantial cash flow, doubled its EPS over the previous year and more than doubled free cash flow (FCF). Last year, it produced $43 billion in cash, above the $19 billion from the prior year. META’s debt-to-equity ratio was 0.123 as of June 2024, suggesting it has a low amount of debt relative to its equity.
Meta Platforms began rewarding the confidence of its shareholders earlier in 2024. It announced a dividend of 50 cents per share and added $50 billion to its share buyback program. That was on top of the over $30 billion previously authorized! In total, it has generated over a 70% return for investors over the last 12 months. Despite these positives, META trades at a relatively reasonable P/E ratio of 29x, which is lower than the average of 35.5x for the technology sector.
Cadence Design (CDNS)
Cadence Design (NASDAQ:CDNS) is a multinational technology and software company. It develops fundamental IT solutions such as circuit boards, radio frequency and analog signaling integration into custom integrated circuits.
This allows the company to operate in high-growth sectors while maintaining a steady presence over many decades. For example, it recently partnered with Samsung to enhance the development of AI chips. As a result, Cadence Design has a relatively low beta of 1.04, indicating its volatility closely matches the benchmark S&P 500 index. This represents a secure position for a technology firm.
Further, CDNS is a low-debt stock with a debt-to-equity ratio of 0.08. This means that for every dollar of equity, the company has only eight cents of debt. Even as interest rates increased, Cadence Design reduced its debt further while its share price continued rising, demonstrating continual improvement. Analysts remain positive about the company’s prospects, forecasting five percent growth to reach analyst average price targets.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.