For the wary investor seeking investments which are more secure and less volatile than investment in the equity markets, fixed income corporate bonds can offer a high rate of return and a relatively stable market value.
The purchase of high rated (S&P A- or better) intermediate term bonds can represent an opportunity to combine return with moderate risk and provide a somewhat less stressful option for a portfolio.
As an example, the purchase of Kraft Foods (KFT) bonds with 3 to 10 year maturities are currently priced to yield about 500 basis points over comparable U.S. Treasury securities. For example, the KFT bond maturing in 2012 is now yielding about 7.8%.
While fixed income investments in this range carry re-investment risk, the bigger concern is will the investor get paid. In that regard, a historically stable cash flow and a company that operates in a defensive sector relative to the rest of the economy provide comfort that interest and principle will be paid in full.
KFT’s third quarter earnings report confirmed that the changes undertaken by management over the last year have served to strengthen the firm’s balance sheet and deliver strong earnings to shareholders. It would seem that the de-linking of KFT from the tobacco industry via the divestiture from Altria (MO), which occurred in January of this year, is paying dividends for the company.
KFT’s sale of its Post Cereals brand has improved company performance and has encouraged analysts, who have reacted positively to the sale. KFT’s business lines are in a market segment which has historically done well across the range of economic conditions, with especially strong performance in a slowing economy or one in a recession as we are now in. (See also: “The High-Dividend Stock: Kraft Foods.”)
As consumers change their spending habits to become more defensive, the products offered by KFT become even more attractive. It is likely that that pattern will be repeated over the next months as consumers adjust to a weak economy, not only in the U.S., but around the globe as well.
KFT currently has 18 debt issuances outstanding, including 2 Euro denominated offerings. The bonds are actively traded, resulting creating liquidity for both buyers and sellers. The company’s recent earnings report indicated that the company remains on track for their earnings projections for the year.
Equity investors have reacted positively to the report and the company’s stock price, which is down 10% for the year—a far cry from the 33% decline in the overall market. Those positive feelings also carry over to the pricing of the company’s outstanding bonds.
Investing in corporate debt is not without risk. For the investor looking for a higher level of current return, however, careful investing in bonds such as those of KFT can offer reasonable safety and good returns.
