Monday, July 11, 2016

Are Common Stocks the New Bonds?

Common Stock Yields for the S&P 500 Above the Yield on Newly Issued Corporate Bonds

With the 10 year US Treasury recently hitting an all-time low of 1.3% yield and the S&P 500 dividend yield at 2%, this is an amazingly large inverse spread!

Historically we are witnessing some head-scratching corporate finance relationships. For example, this past Thursday, The Walt Disney Company sold a 30-year corporate bond with a 3% coupon rate and a 10-year bond with a 1.85% interest rate coupon, the lowest long-term borrowing costs in United States corporate history! 

Disney’s common stock (ticker: DIS) is selling at $100 per share and its dividend yield is 1.43%. While this isn’t a negative spread to their dividend, it is none-the-less puzzling because Disney is not a low growth utility company --- there is still plenty of potential stock appreciation for DIS shareholders.

What corporate CFO is not looking to lock in these incredible low corporate borrowing rates and repurchase their firm’s common stock? Is there a better investment that a company can find - its almost an arbitrage opportunity for firms.

Get ready for another large wave of corporate refinancings and increased stock buy-backs. 

And for bond investors seeking yield, take a look within a firm’s capital structure – you might be surprised to find the dividend yield on a firm’s common stock outpacing the corporate bond yield – amazing times!