Years of ultra-low interest rates made it easy for companies to issue debt at a low cost. As a bonus, companies could even deduct their interest payments for tax purposes.
Today, with interest rates rising, it makes less sense for companies to take on debt. They would need a project with a high prospective return to justify the costs. So companies paying down debt rather than looking to add more or refinance at today’s relatively high rates may offer solid returns.
One company paying down debt right now is
Occidental Petroleum (OXY). Like many big oil players, holding off on investing in new properties right now has increased cash flow. And the debt being paid down is a preferred share series with a hefty 8 percent yield issued to Berkshire Hathaway (BRK-B).
Having less debt will decrease interest expenses, which will directly improve the bottom line. That could further increase the oil giant’s profitability, even as oil prices stay near the lower end of their 52-week range.
Action to take: Shares are reasonably valued under $60, a price where Berkshire continues to accumulate the stock. Occidental does pay a dividend, but at 1.2 percent, it’s at the lower end of the range for big oil companies. Income investors may want to look at a competitor for a higher yield.
For traders, the company will likely continue to trade in a range. Under $60, it’s near the lower end of that range. The August $65 calls, last going for about $2.48, offer mid-double-digit returns on a bounce higher in the coming months.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.
