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.
TheMoneyMadam
