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If you're trying to maximize return and minimize risk, you can't beat a high-yield stock that is a better credit risk than U.S. Treasuries.
It sounds crazy but it's true. The rate of insuring against the default of the debt of 70 large U.S. companies is lower than that to insure the debt of the U.S. government.
Meanwhile, the record-low yields on U.S. Treasuries – the 10-year note dropped below 2% recently and isn't much higher now – have put them below the yields of several major U.S. companies.
It cost about 50 basis points (bp) to insure U.S. Treasury bonds against default for five years; that translates to a cost of $50,000 annually to insure $10 million of bonds. But the cost to insure the debt of dozens of U.S. companies is less than 50 bp; for some it's as low as 30 bp.
And the United States is far from the riskiest government debt; Germany's credit default swaps were recently trading in the low 80s; Japan's and China's around 110 bp; and France's in the 150 bp range.
"There is no reason why governments should be considered better credit risks than top-quality companies," said Money Morning Global Investing Strategist Martin Hutchinson. "The Proctor & Gamble Co. (NYSE:PG) and The Coca-Cola Co. (NYSE:KO) make tangible products that people want to buy – and they do so at tightly controlled costs. So it's clear that companies like these can repay modest levels of debt under almost any circumstances.
"The same is not true for a government," Hutchinson continued. "Especially one that makes no money itself, produces few goods and services of value, and obtains money only by squeezing its unfortunate taxpayers."
Thanks to U.S. budget deficits that have grown into a massive $14.6 trillion debt, the credit default swap markets have determined that the U.S. government is no longer a risk-free investment.
Meanwhile, some companies have hit upon a magic combination of being a better credit risk than Treasuries while offering high-yield dividends and the potential for capital returns.
Here are five such companies:
Bristol-Meyers Squibb Co. (NYSE: BMY): This pharmaceutical giant offers a yield of 4.53%, more than twice that of a 10-year Treasury bond, and a payout ratio of 68%. In its most recent fiscal year, Bristol-Meyers Squibb turned $14.21 billion in profit on revenue of $20.35 billion. It has an operating margin of 32.74%.
The Coca-Cola Co: Coca-Cola sells its beverages everywhere on earth and has one of the most powerful brands in the world – a trait that benefits many top U.S. companies fighting a weak economy. It has a yield of 3.19% and a payout ratio of 34%. Coke's net revenue was $23.3 billion in the first half of 2011, up 44% from a year ago. The company had $14 billion in cash as of the second quarter.
McDonald's Corp. (NYSE: MCD): Yet another American icon that has profited from spreading its brand around the world, McDonald's lately has been reaping the rewards of a rapid expansion in China. Its stock has a yield of 2.69% and a payout ratio of 48%. The company made $9.64 billion on revenue of $25.54 billion in its most recent fiscal year. It had a healthy operating margin of 30.44%.
AT&T Inc. (NYSE: T): The legendary phone company has successfully morphed from the Ma Bell of yesteryear to a modern telecommunications giant. It has a yield of 5.81%, much higher than a 10-year note, and a payout ratio of 50%. In its most recent fiscal year AT&T had profit of $72 billion on revenue of $125.58 billion. Its operating margin was 15.51%.
Lockheed-Martin Corp. (NYSE: LMT): One of America's premier defense contractors, Lockheed-Martin excels at building aeronautics and other very high-tech systems. It has a yield of 4.05% and a payout ratio of 36%. In its most recent fiscal year, Lockheed-Martin earned $3.84 billion on revenue of $46.37 billion. Its operating margin was 8.38%.
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