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Friday, October 22, 2010
Walmart sold $5 billion of debt this week:
$750 million 3-year maturity 0.75% (+22 bps to 3-year Treasury)
$1.25 billion 5-year maturity 1.50% (+35 bps to 5-year Treasury)
$1.75 billion 10-year maturity 3.25% (+69 bps to 10-year Treasury)
$1.25 BILLION 30-year maturity 5%. (+106 bps to 30-year Treasury).
If held in a taxable account, the interest payments on these bonds is taxed up to 35%.
In comparison, Walmart's stock is at $54. It's basically unchanged over the past 10 years, despite a huge move in earnings and dividends. Today the dividend yield is 2.3%, and it is a qualified dividend so gets taxed at 15%, at the most. Furthermore, the dividend has been increased annually.
Yet investors are piling into the bonds!
All of this is detailed in "When Will the Madness Stop?" In the article, Brett Arends attributes the seemingly irrational behavior to investors first deciding on asset allocation, i.e. what percentage of stocks and bonds to hold, and then investing according to the allocation. This is an important point. With yields so out of kilter between bonds and stocks, it is time to look at dividend-paying stocks as a substitute for bonds in the asset allocation process.
At least that's my take.