What
do you do if you need investment income?
-
Equity returns are negative
-
Property funds are lowering dividends
-
Savings and fixed deposits returns are declining and are negative
after inflation and taxes
Are
corporate bonds the answer?
In Germany,
Italy, Australia and
New Zealand big new corporate bond issues are being snapped up by
private investors.
In Japan where
equities, property and deposits have been unattractive for years –
retail investors bought just over a quarter of investment-grade bonds
issued in the first quarter this year.
On
the face of it corporate bonds or bond funds are attractive, For
example the Markit iBoxx euro-denominated corporate bond index,
filled with household names and with a coupon of 5.2 per cent, is
currently yielding 7.2.
But
you should be careful.
Any
newcomer to corporate bond funds hoping for quick return may be
disappointed. Credit markets are in a profound slump, largely immune
to rallies in other assets.
Additionally
with bonds the upside is limited while the downside caused by rating
downgrades and interest rate movements can be substantial.
Furthermore
investors should bear in mind that there are good reasons that bond
markets have historically been dominated by professionals.
An
investor buying a share in a company has one thing to monitor. With
bonds, there may be dozens of alternatives from the same issuer, each
with its own interest rate curve.
Also
prices are driven by credit worthiness, expressed by credit agency
ratings. In the first quarter 2009 Moody's reported the largest
number of companies with rating deterioration since the depression in
the 1930's
Also
trading volumes are low. For example no Vodafone bond has anything
like the liquidity of the stock.
Private
investors should also be weary of markets where professionals are
staying away.
Investors
with an long term inflation expectation will also do well avoiding
long term fixed rate bonds as they would most likely to be the worst
performing asset class.
What
do I do with my cash at the moment?
-
I
am currently more than happy to keep my cash in call and term
deposits with a stable bank that had adequate deposit insurance.
-
Should
your cash holdings exceed the deposit insurance limit I suggest you
spread the cash around to ensure you have adequate cover.
-
Now
is not the time to run after long term investments with high yields
in an asset class you have little knowledge of.
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P.S. A media company in the wrong country at the wrong time...
This month the company I found for subscribers is located in France.
In terms of the size of companies I look at its quite large with a market value of €1,72 billion.
The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.
In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.
Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.
When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.
I am sure you will agree this is undervalued.
To immediately get your hands on this value investment idea (for as little as €39) click here. |
