Bond Investments – Top 3 Non-Cyclical Corporate Issuers
By Rom Badilla, CFA
August 29, 2012
Speculation on the Federal Reserve’s next move is running rampant as we move closer to Chairman Ben Bernanke’s speech at Jackson Hole and the FOMC meeting in mid-September. While it remains to be seen as to what will happen exactly, the Federal Reserve if they act that is, is closer to adding stimulus to the economy rather than removing it assuming that signs of weakened growth persist. This may mean even lower yields which in turn should continue to bode well for bonds from both a potential price gain and carry perspective. If bad times for the market are ahead, shifting toward non-cyclical and consumer staple-focused companies may be prudent since a downturn will have less of an effect on their businesses. Sports fans will know that playing defense can win you some football games.
Below are details of three investment grade corporate issuers, featuring bonds maturing in the intermediate and long end of the maturity spectrum. The purpose of showing both is to allow investors the opportunity to tailor their bond investments in accordance with their investment objectives.
Information and market quotes on the bond investments are provided by Trade Monster’s Bond Trading Center (unless noted otherwise). Furthermore as a gauge of the overall credit worthiness of the company, we provide some simple credit metrics of each company, Long Term Debt to Total Assets Ratio and the Interest Expense Ratio.
The Long Term Debt to Total Assets ratio measures a company’s leverage by determining the percent of assets have been financed by debt. A higher percentage indicates more leverage and more risk.
There are two components that make up the next ratio. Earnings Before Interest, Taxes, Depreciation, and Amortization aka EBITDA is one measure of profitability while Interest Expense is the cost of debt. Combined, this ratio aka Interest Coverage Ratio measures a company’s ability to service their debt. In other words, it shows how easily a company can pay interest expense given their profitability. A higher Interest Coverage Ratio implies better credit health since it is making enough money to stay current with their debt interest obligations. Conversely, a red flag is raised when this ratio approaches 1.5 or lower since its ability to pay the interest on their debt is questionable.
Without further ado, here are the issuers:
The Kroger Group (Equity Ticker: KR) has many bonds issued on the back-end of the yield curve. This supermarket chain employs over 300,000 people across the country and is the largest grocery store chain in the U.S.
According to Bloomberg, the Kroger Group has a Long Term Debt to Total Assets ratio of 34.8%. In addition, the Interest Coverage ratio for the past year stands at 6.7x.
Here, two senior secured notes are featured. The first one sports a 3.4% fixed coupon that pays semi-annually and matures in April 15, 2022 (CUSIP# 501044CQ2). This bond features a make whole call and is currently being offered at a dollar price of $104.01 which equates to a yield to maturity of 2.92%. For those looking for liquidity, this bond which has a deal size of $500 million and was issued in April of this year can be sold at a yield of 3.03%.
As for a longer maturity bond that offers a little more yield, there is a bond that has a 5.4% fixed coupon that pays semi-annually and matures in July 15, 2040 (CUSIP# 501044CN9). As with the shorter term option, this bond has a make whole call and has a yield to maturity of 4.79% and is offered at a dollar price of $109.35. The long dated bond was issued in 2010 at a deal size of $300 million and can be currently sold at a yield of 5.00%.
Both bonds are rated investment grade by both rating agencies. Standard & Poor’s rates both bonds BBB while Moody’s has both of these senior notes at Baa2.
The Altria Group (Equity Ticker: MO) is one of the largest tobacco corporations. The Virginia based company employs over 10,000 individuals with a reach than spans worldwide.
The Altria Group has a Long Term Debt to Total Assets ratio of 35.4% while the Interest Coverage ratio for the past 12 months is 5.9x according to data provided by Bloomberg.
For those looking to add some yield to their bond investments without compromising quality, there are options available. Currently, tobacco bonds are trading in line with the overall corporate bond market from a yield perspective but offer a little more than other lower yielding consumer staples.
The first Altria Group bond pays a 2.85% coupon, semi-annually and pays final principal at the maturity date of August 9, 2022 (CUSIP# 02209SAN3). These senior notes are currently being offered at a dollar price of $99.24 which translates to a yield of 2.94%. In addition, this recently issued bond is massive and should be fairly liquid due to its deal size of $1.9 billion. Bonds can be sold with little concession relative to the offered side. These bonds can be sold currently at a yield of 2.98% in the secondary market.
Out the curve in order to add more yield, Altria also issued another senior note earlier this month. This bond which has a deal size of $900 million pays a semi-annual coupon of 4.25% until maturity which is set for August 9, 2042 (CUSIP# 02209SAM5). According to Trade Monster, these bonds are yielding 4.40% to a buyer which equates to a dollar price of $97.47. In addition, these bonds can be sold at a yield of 4.50% given today’s markets.
Both bonds are non-callable and are rated BBB by Standard & Poor’s and Baa1 by Moody’s which falls under the investment grade spectrum.
For our final spotlight, we move toward beverages. Earlier we talked about how defense can win football games. Though with beer in hand while watching their favorite team, everyone wins!
Molson Coors-Brewing Company (Equity Ticker: TAP) produces and sells beer across the entire Northern Hemisphere through a variety of brands such as Coors Light, Molson, and Keystone. The company is headquartered in both Denver, Colorado and Montreal, Quebec employs over 9,000 people and is one of the largest brewers by volume.
The beverage company has a Long Term Debt to Total Assets ratio of 15.4% while the Interest Coverage ratio over the past year stands at 5.4x according to Bloomberg.
Molson Coors features a bond that pays a fixed semi-annual coupon of 3.5% and matures in May 1, 2022 (CUSIP#60871RAC4). The senior notes have a make whole call and can be bought at a dollar price of $105.77 for a yield of 2.81%. These bonds were issued in April 2012 and have a deal size of $500 million. Having said this, the deal is large enough where liquidity is ample in the market place. These bonds can be sold at a yield of 2.90%.
By extending out the maturity, the yield increases for the buyer to 4.19%. This translate to a dollar price of $113.72 for the 5.0% Coupon bond that matures in May 1, 2042 (CUSIP# 60871RAD2). The senior notes have a make whole call feature and sports a deal size of $1.1 billion. Given this large deal size and presence in the market place, sellers can find liquidity in the market place and execute at a yield of 4.31%.
Both bonds are rated by Standard & Poor’s and Moody’s which have them at BBB- and Baa2, respectively.
All of the aforementioned bonds were highlighted with dollar prices in mind. These bonds were chosen for its closest proximity to par which led to a concession in the overall yield. So if you are less sensitive to dollar prices and can pay well above par, better value can be found in terms of the yield to maturity.
Furthermore, keep in mind that corporate bonds trade over-the-counter. So, prices and yields can vary depending on the broker you use. The best suggestion to use is a broker that offers the most visibility and price transparency for the corporate bond market.
Finally and as always, every bond investor should perform their own due diligence when making their investment decisions.
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The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.