A Bond Yield Bonanza for These Companies

Johnson & Johnson (NYSE: JNJ  ) put its AAA bond rating on the table last week and crushed McDonald's (NYSE: MCD  ) recent bond yield record by issuing a 10-year with a coupon under 3% priced to yield 3.15% and a 30-year with 4.5% coupon, 4.63% yield. How good is that? At the 10-year yield, Johnson & Johnson could improve cash flow by issuing bonds and buying back its own higher yielding stock. Since interest expense reduces taxable earnings and dividends don't, the math is close, even at the 30-year yield.

To find companies that could take advantage of the cheap money, I searched for A or better bond ratings and debt with 6% or higher coupon maturing within the next five years. Some of the hits are shown in the table below along with the range of coupon rates, amount of debt maturing in the next five years, and estimated annual interest savings when the debt is rolled over. The assumed rollover rates for the savings estimates are 3.25% for 10-year and 4.75% for 30-year bonds. Annual savings would be even higher with shorter-term debt.

Company

Coupon Rates

Debt Maturing Within 5 Years

Potential Savings Range (cents per share / year)

Dover (NYSE: DOV  )

6.50%

$400,000

3.8 / 7.0

Target (NYSE: TGT  )

4%-10%

$3,250,500

6.2 / 12.8

PotashCorp (NYSE: POT  )

5.25%-7.75%

$1,350,000

7.0 / 13.8

AT&T (NYSE: T  )

4.75%-8.13%

$22, 435, 449

5.8 / 11.5

Verizon (NYSE: VZ  )

3.1%-8.63%

$21,705,026

5.8 / 17.3

Source: Coupon rates and amount of debt, FINRA.org; savings, author's calculations.

With these low yields, chief financial officers should be busy studying economic reports, crunching finance models, and dusting off their Captain Midnight decoder rings to time bond issues and find the sweet spots on the yield curve. Whatever they find, the cheap money should offer companies with good ratings and maturing higher yield debt some nearly effortless cost savings.

In addition to savings from debt rollover, these low rates give company investments like acquisitions and capital expenditures lower hurdles to overcome. Projects that didn't make sense at 6% or 7% might make sense at 4%.

The market is bidding prices up and yields down on high-grade corporate debt and companies with strong, investment-grade ratings stand to benefit from cheaper money. I plan to start checking bond ratings before making investments ... some companies have great debt opportunities ahead of them.

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Fool contributor Russ Krull owns shares of McDonald's, Johnson & Johnson, and AT&T, but no other companies mentioned. The Fool has a disclosure policy that would be rated quadruple-A if disclosure policies were rated.


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