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Friday, October 22, 2010
The Inmates Are Running the Asylum
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.
Posted by Robert Wasilewski at 3:10 PM
Labels: DIY investing
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Great post Robert,ReplyDelete
The beauty is that the inmates are always running the asylum: bonds and gold today, tech stock in the late 90s, real estate in 2002, emerging markets whenever they're high,the nifty fifty of the late 50s, and the reluctance to buy equities in 1974. Ben Graham pennned something similar then to what you penned now. I think he was asking whether equities were worth more dead than alive. I do love human nature. I find it enjoyable to profit from.
Rob, I have to admit i do not understand why investors are piling into these bonds. I would have understood if it was for the yield but that is not the case as the yield is miserable.ReplyDelete
Lately, Pipelines & infra + REITS have been kicking one 52 week high after another. This is the result of chasing yield in this market. I would say some of these companies would be as safe as those bonds but with double the yield!
On the other hand, if you are Wal-Mart or any other quality company why not load up on cheap debt now while you have all these hungry investors will to lock in for 30 years at 5%.... pretty good deal for the companies.ReplyDelete
Re: Andrew Maybe the "King of Hearts" starring Alan Bates should be shown the first day of Investing 101. You're right of course - the inmates are always in charge.ReplyDelete
re: Kevin Actually Brett Arend's theory is interesting. Maybe we're a bit backwards when we do asset allocation and decide on 30% bonds and then go out and buy bond ETFs and the managers have to buy the newly issued debt etc, because they are indexed. This works in normal times but when yields get out of whack we need to reconsider - there is some point where the uncertainty of buying a solid dividend paying stock overrides the deterministic interest paying instrument. Anyways it has got me to thinking that a dividend paying ETF becomes a closer and closer substitute for a bond ETF as the yields come together.
re: Grouch Good point. For a number of years IBM seemed to have the knack of issuing debt at the bottom in rates. I agree that Wal-Mart's CFO is getting a heck of a deal, especially on the long term issues.