by Jamie Dlugosch | February 5, 2009 7:28 am
Over the last several months, I’ve written on numerous occasions that investing in corporate bonds offers one of the best opportunities for solid returns in the current market environment.
A close look at Williams Companies (WMB) offers a case study of why an investor should have corporate bonds in their portfolio.
Williams Companies operates one of the nation’s largest natural gas pipelines, delivering almost 12% of the country’s daily supply of natural gas. The company also produces enough natural gas to serve the needs of over 4 million homes.
Williams has increased its production of natural gas by 800% over the last ten years.
Using their imagination and creativity, Williams laid the foundation for the country’s fiber optic cable system when they ran the first fiber optic cables through decommissioned pipelines. The fiber optic operation was spun off into a separate company in 2001 and maintains over 33,000 miles of fiber optic cable.
2008 was one of the most volatile in the history of oil prices. Prices skyrocketed for most of the year, reaching nearly $145 per barrel by mid-year. Over the succeeding six months, the price of a barrel of oil dropped as fast as it had risen.
Oil company earnings mirrored the moves in the price of crude, as did their stocks.WMB peaked over the last 52 weeks at $40.75. Last week, it reached a low of $11.69 for the period.
Currently trading at $13.87 per share, WMB is rated a sell by several analysts who do not see much upside for the stock in 2009 or 2010.
Williams is a financially sound company. With over $5 billion in current assets and under $4 billion in current liabilities, the company has a current ratio of 1.3 as compared to the industry average of 0.9. Williams has long-term debt on their books of $8.9 billion and equity of about $6.5 billion. The debt-to-equity ratio for the company is under 1.3. The industry average is 7.74.
While WMB stock has lost substantial value over the last 12 months, the opposite is true for the company’s bonds. William’s 7.625% bonds due in 2019, for example, are currently trading at a price of about 98, producing a yield to maturity of 7.92%.
The bond had traded at 75 as recently as December 15, 2008. An investor who purchased the bond on that date would have earned a high level of current return and a capital gain if sold of about 25%.
For an investor wanting some exposure to the oil and gas sector, the purchase of bonds offers a great opportunity for attractive income with the potential for a capital gain as well.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
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