Monday, June 3, 2013

BONDS Cliffs Natural Resources CLF Bond for your retirement

Strategic Risk - Euro Bonds

It has been a while since I profiled a bond.   Today, I added this bond to my portfolio.  I like to shop for bonds on Mondays and I like a bond that is selling at a discount, is less than 10 years in maturity and is backed by a company with decent fundamentals.  Let’s look at how Cliffs Natural Resources’, symbol CLF, 2020 bond meets my needs for investment income.

Bonds priced on Monday:

Unlike stocks, bonds are a smaller universe for the ordinary investor.  Prices tend to be set on Monday.   This is when bond buyers go shopping.  So often in the past, I would find a bond I liked and by the time my client made a decision to buy, the inventory was no longer available or if it was the price increased and the yield decreased.

FINRA (Financial Industry Regulatory Authority) has a bond search feature.  It used to be quite good but they have revised it and I find it useful but not as rich as it used to be.  MarketAxess has a corporate bond edition (MarketAxess website) that individual investors can use to see a list of investment grade and high yield bonds.   Monday’s are a good time to look at their corporate bond edition.

In order to buy a bond, you have to know the “CUSIP.”  You can search your brokerage account but they tend to have a limited supply of bonds available to individual investors and they rarely have high yield bonds available online.   If you know the CUSIP, you can enter it to see if the bond is in their inventory; some brokers like Schwab will let you buy online.   Your alternative is to call the broker’s bond desk and ask them to shop for the particular bond.  They will get a price on the open market and you can decide if you want to buy the bond.

Buy at a discount:

Bonds are priced at what is known as par value or $100 per bond.  It is a little confusing because 10 bonds actually cost $10,000 which would be $1,000 per bond.  For the purpose of buying and selling, par is $100 per bond.    At par, the coupon yield is the effective yield.  A five percent coupon will pay you five percent every year until the bond matures; when the bond matures you get back your invested principle.

I like to buy at a discount which means the yield is higher than the coupon.   If the bond costs me $90 instead of $100, the five percent coupon is a yield of 5.55% over 10 years.  When the bond matues I also get a capital gain because I will get back $100 not just the $90 I paid for the bond.

If you buy at a premium, let's say you pay $110.00 for the bond, your yield will go down to 4.54% over 10 years and you will get back only $100 when the bond matures.   I do not like that kind of return.

Cliffs Natural Resources (CLF) 2020 bond:

The CUSIP for this bond is 18683KAB7.   The bond pays a coupon of 4.8%, it matures October 1, 2020 and today I paid $96.523 for each bond which translates into a yield of 5.38%.

I like a bond that matures in 5-10 years.   This bond matures in seven years and about four months.    Interest rates will be volatile during this time frame.  Some days the price of this bond will be up and other days it will be down.  As long as the company is solvent, it should both pay the coupon to me (bondholders are paid every single day they own the bond … unlike dividends) and the company should return $100 to me when the bond matures.

I cannot predict what interest rates will do.   It could be that in seven years, when this bond matures, I can replace it with a bond that pays 10%.   Do not laugh at that prospect because this happened in the past during the hyperinflation period in the 1980’s.   Equally possible, I may not find a bond to replace this one with a yield that is as good as 5.38%.   You have to weigh how much you need 5.38%.   Right now, I need that yield and I like the potential capital gain.

CLF, had one terrible quarter where they took loses.  They are in the metals, mining, and coal business and the coal part has not been pretty.   Yet, fundamentally, I find this company a pretty safe bet.   Their book value is $37 per share yet it trades at $17.92 per share.   Their D/E ratio is .60 which is very healthy.   Finally, their interest coverage ratio is 3.4. 

Do you own homework, and then decide if a bond of this type will fit into the income producing portion of your portfolio.


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