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5 Stock Winners From the Rush to Bonds

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The choice between stocks and bonds may be obvious to many investors. But for some who are stuck trying to buy bonds at any cost, the pickings are getting increasingly thin. That bodes well for companies that have managed to keep their bond ratings high despite increasingly difficult economic conditions.

Giving people what they want
Despite record-low interest rates in many countries, demand for bonds has remained extremely high. With easy monetary policy combined with relatively weak economic activity around the world, institutional investors have a lot of spare cash floating around, and they're looking for better ways to put it to work than having it sit in short-term accounts earning close to zero. Bonds involve risk, but they also carry at least slightly better returns.

In other cases, bonds are simply the best investment to match up with obligations that companies have. For instance, insurance companies can predict at least to some extent when they're likely to have to pay out on their policies. Buying bonds that are slated to mature on those anticipated payout dates makes it far easier for insurers to manage cash flow and avoids problems like we saw during the financial crisis, when cash was tight and selling assets at extremely low levels wasn't an attractive alternative.

Making the grade
The problem, though, is that the same factors that have supported bond demand have helped dry up bond supply, at least among those companies with the strongest bond ratings. As a Barclays report cited in Barron's points out, the average rating of bonds in its U.S. Corporate Index has fallen steadily for years, with less than 10% of the index made up of top-rated AAA and AA debt.

That's consistent with the activity among issuers in the bond market recently. Corporate issuers are taking every opportunity to cut their borrowing costs and extend their repayment dates, and as yields continue to drop, investors are more willing to take on far riskier debt than they would have considered during more normal rate environments.

Even among government debt, high-quality pickings have gotten scarce. With downgrades of sovereign debt ratings, from the U.S. downgrade to AA to much smaller countries seeing even lower ratings, it's hard to find safe debt.

These companies have what you want
Barclays did point to several companies that still have AAA and AA ratings. Historically, financial stocks tended to make up a big portion of the highest-rated bonds, but the financial crisis in 2008 put a stop to that. Now, only Berkshire Hathaway (NYSE: BRK-B  ) makes the top five, and even it got downgraded a couple years ago by S&P.

But outside the financial sector, you'll find some tried-and-true stalwarts staying the course. Consumer products giant Procter & Gamble (NYSE: PG  ) makes the list despite having faced some headwinds recently from higher input costs and a strong dollar. Wal-Mart (NYSE: WMT  ) also has a strong bond rating, as it once again starts to grow following a long period of falling same-store sales. And in the technology sector, both IBM (NYSE: IBM  ) and Microsoft (Nasdaq: MSFT  ) give bond investors the safety they want, thanks to their stable cash-cow businesses.

...but not much of it
Unfortunately for bond investors, though, part of what has given these companies the bond ratings they have is that they don't have a lot of debt. According to S&P Capital IQ, Microsoft has about $12 billion in long-term debt, while IBM has $26 billion, P&G $21 billion, and Wal-Mart $43 billion. Berkshire lists a total of $60 billion in debt on its books, but much of that comes from subsidiaries.

Add the four non-Berkshire figures together, and the total of roughly $100 billion in high-quality debt barely scratches the surface of the multitrillion-dollar bond market. That won't be enough to make bond investors happy, but it will be enough to put those companies in the catbird seat when it comes to making future demands on the credit markets.

Boosting prospects
What these figures essentially give companies is a chance to make dramatic strategic moves that require outside financing. With the credit markets standing by to give billions to creditworthy borrowers, these five companies are in perfect position to execute on whatever ambitious plans they may have.

Bonds are useful, but your long-term financial health depends on higher-growth investments. Get some ideas for stocks you can trust for the long haul from the Fool's special report, "3 Stocks That Will Help You Retire Rich." Get your free copy today while it lasts!

Fool contributor Dan Caplinger has been a winner from the rush to bonds. He owns shares of Berkshire Hathaway. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Microsoft, IBM, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Berkshire Hathaway, and Microsoft, as well as creating bull call spread positions on Wal-Mart and Microsoft and a synthetic long position on IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy never makes you rush.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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