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Bond Yield Bonanza



August 16, 2010 – Comments (8)

With record low bond yields, I tried to find some companies that have maturing debt that they should be able to roll over at lower rates.  The same general idea as a homeowner refinancing at a lower rate.

Several companies have enough debt maturing in the next few years that rolling it over at today's rates results in significant interest expense savings.  Cost cutting with virtually no effort. 

Here's the rundown.

Your thoughts or questions are welcome here or at the article.

Fool on!


8 Comments – Post Your Own

#1) On August 16, 2010 at 7:17 PM, chk999 (99.96) wrote:

Nice insight. There are a bunch of companies that could save money by rolling various debt maturities into medium term bonds. This needs further research!

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#2) On August 16, 2010 at 7:59 PM, Option1307 (30.51) wrote:


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#3) On August 17, 2010 at 12:34 AM, Valyooo (33.72) wrote:

I read some other blog (or maybe it was a pitch) saying JNJ could save money by floating more 2.9% debt and using that money to buy back their stock which is paying 3.7% dividend.

How is that logic sound?  Do capital losses not exist?  Personally I think JNJ is a bargain right now, but its not as simple as that.

Also, the logic was that there was a disconnect...But what company on the planet would float debt that required them make a higher interest rate than they were making? Wouldnt any company be floating debt and have higher earnings?

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#4) On August 17, 2010 at 8:10 AM, rd80 (95.76) wrote:

That was me with the 'floating debt and buying back stock'  comment both in the article and in a reply to TMFMarathonMan's blog entry.  The only reason not to do it is the unknown price of rolling the debt in the future.  Taken to extremes, floating debt to buy back shares would put the credit rating at risk and at some point the stock price would be bid up and the bond prices bid down to where it didn't make sense.  However, I think JNJ could easily do this with a few billion and not upset either apple cart.

Floating debt at a higher rate than you can earn would be poor business practice, but in this case, JNJ could save a 3.7% payout by financing the purchase with about a ~3% bond.  The cash flow benefits get even better when taxes are considered.

To be clear, I don't think JNJ is planning to use the debt for share buybacks.   JNJ just said 'general corporate purposes' in the use for debt part of the 8K.  However, it has $1.1B of  debt coming due in the next few years and the total of the two new issues was $1.1B, so a reasonable guess is the new debt is intended to pay off those two maturing issues.

Thanks to all for the comments and recs.

Fool on!


Long JNJ.

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#5) On August 17, 2010 at 2:22 PM, Valyooo (33.72) wrote:

Yeah, but my point was that what if the stock shows capital losses? Then you would have been better of buying the bonds, so JNJ should not float debt to take advantage of a higher yield, because the stock price might decline more than the arbitrage

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#6) On August 18, 2010 at 12:44 AM, Momentum21 (98.05) wrote:

nicely done Russ...especially on the Potash idea... : )

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#7) On August 18, 2010 at 1:00 AM, truthisntstupid (75.41) wrote:

Very cool! I almost didn't click on this because of the title, since I have no interest in bonds.  I'm sure glad I did! 

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#8) On August 18, 2010 at 8:55 AM, rd80 (95.76) wrote:

@Momentum21 - I'm guessing BHP read the article and that's what triggered the offer :)

@truth - thanks for the comment.

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