This Week’s Best U.S. Bond: Blyth (BTH) 5.9% YTM due on 11/2013.
Blyth is one of the leading marketers of candles, home fragrance and home decor products. Headquartered in Connecticut, it sells products on a global scale. Blyth is the parent company for the Candle Company of America which owns the well known brand Sterno and PartyLite which is a direct marketing company. It offers products via Internet, mail catalog, direct sales, and wholesale channels. For the last 12 months, Blyth has generated $920 million in sales of which over 30% came from overseas markets. Initially formed in the 1970’s, Blyth went public in the early 1990’s.
At Durig Capital, we have developed a process to review, select, purchase and monitor corporate bonds on an ongoing basis. Enclosed is our review, along with supporting documents, showing why we believe this corporate bond makes sense in clients' portfolios. We reviewed thousands of separate corporate bond listings to find what, we believe, is currently the best corporate bond for investors. The following includes our selection criteria.
Step 1 - Yield Curve at 4-7 Years Out
We have seen quite a swing in the price of Treasuries in the last few weeks which have hit six month highs. Seeing U.S. Treasury rates rise (prices fall) at an amazingly fast pace worries fixed income investors. The declining value of the underlying principal may be troublesome if one would need to liquidate. Past readers may recognize that we are attempting to insulate against this by keeping maturities shorter. We like these bonds because the may increase fixed income investors income stream while not stretching maturities to manage income.
Typically, investors would only be able to find a decent yield if they extended the maturities to at least four years and even there the yields have been marginal. While sorting through hundreds if not thousand of issues to meet our stringent criteria, we came across a shorter term issue that has a good yield and short maturity, a double win in our minds. This Blyth issue meets our criteria for managing accounts for higher income while generating a decent yield, so the fact that it matures in less than three years could be considered as an added positive.
Step 2 -The company must be profitable
As stated above, Blyth generated revenues of $920 million over the last 12 reported months. This is down from years past when sales topped $1 billion. The company’s products can be considered gift items and this makes revenue and net income seasonal in nature. Historically, Blyth has earned a large majority of its income during the “Christmas Season.” This can be seen in the reported net income over the last four quarters---August-October 2010 $0.31, May-June 2010 $0.09, February-April 2010 $0.51, and November 2009-January 2010 $3.61. It is important to note that although earnings are seasonal, Blyth produced net income in each quarter combined with an extra large profit during the holiday season.
Management recently held a conference call and announced earnings guidance for the 2011 fiscal year (Feb 2011-Jan 2012). They revised their forecast of net income downward from $3.35 - $3.05 range to $3.00 - $2.80 range. Although these forward looking estimates are lower than the annual trailing figures, it is still important that Blyth remain highly profitable.
Hidden Value----What is Blyth doing with the profits
Another important factor to consider is that Blyth has been paying a dividend for about 10 years. The fact that management feels comfortable enough to pay shareholders a dividend should make fixed income investors comfortable. If tough times occurred, debt holders have a priority position in the corporate structure. This year, Blyth has paid $0.20 in regular dividends per share or $1.6 million and during its third quarter earnings announcement. It also declared a special one time dividend of $1.00 per share or $8.2 million. Blyth is similar to our previous review of Unitrin in that they both pay dividends. The payments of almost $10 million dollars to shareholders this year may comfort fixed income investors.
On top of the dividends, management has also engaged in a share buy back program that has reduced the number of shares outstanding by over 5,000. These buy backs occurred during the second quarter. Using the most conservative numbers, the 52 week low of the stock price at $25.91, management used at a minimum $13 million in cash to repurchase shares. We have seen this in previous bond reviews, such as Seagate, and the position has done quite well. Gestures such as a special dividend and share buy backs indicate management’s beliefs in the company’s ongoing operations.
Step 3- How about those interest coverage ratios
As mentioned above, the nature of Blyth’s products are seasonal in nature. Understanding that earnings are cyclical, it is prudent to investigate the leaner times of the fiscal year. Blyth earned $4.52 during the last 12 months of which 80% was attributed to the “Christmas Season.” Since it is easy to see why coverage ratios would be sufficient during that quarter, let’s inspect the other three that represent 20% of sales.
Operating Income by quarter trailing three “lean” operating quarters
|Feb-Mar 2010||May-July 2010||Aug-Nov 2010|
|Earnings Before Interest and Tax||$7.06||$4.13||$5.74|
|Times interest earned||4.02||2.29||3.19|
****figures in millions of U.S. Dollars****
As illustrated, even during the leanest quarter, May-June, Blyth still earned 2.29 times the interest service requirements. There is also the strong quarter of November-January which had a coverage ratio last year of over 20. Overall, the annual trailing ratio is a very strong 7.41.
Step 4 - Debt to cash ratio.
Blyth has enough cash to pay off its long term debt if it chose to do so. As reported in its SEC filings, the company had $116.9 million in cash and $109.8 million in long term debt. It should be noted that these numbers reflect October 31, 2010 balances and since then the special dividend of $8.2 million was paid. On the other side, Blyth is currently in its best quarter historically for cash generation.
Step 5 - We like companies that have flexible balance sheets
Having a strong balance sheet is desirable. When times are tough, companies may need to raise capital and being able to do this with debt or equity allows flexibility. Firms that are bloated with long term debt are seen as risky as one bad earnings period can be the difference between operating and bankruptcy.
Blyth has a sound balance sheet. This issue is, as far as we can see, the only long term debt item of significance. The issue was originally offered in 2003 and had a par value of $100 million. As noted above, current long term debt is just over this amount and can be attributed to lines of credit and long term debt issued from subsidiaries before the company was acquired. As of October 31, the long term debt to equity ratio is .37 ($109.84 long term debt/$294 market cap). Although this is higher than companies we’ve written about in the past, such as Netflix, it still consider much better than most companies we review in the selection process of This Weeks Best Bonds.
Step 6- We like high yields
These bonds are currently priced to have a 5.92% yield to maturity. The corresponding U.S. Treasury maturing in 3 years is yielding .981%. Just for curiosity sake, the 30 U.S. Treasury is yielding about 4.5%. Although the credit ratings are different, Blyth’s bond is yielding six times higher than the governments for the same time period.
We believe that we found a good bond here. With the positive earnings, ability to generate cash, and good yield, this bond should be considered for one’s fixed income portfolio. The ability for the investor to generate 5.9% yield over three years is also quite attractive. Although this issue is has a B3/B+ rating, we believe it is well-positioned and have included it as a position in our fixed income portfolios.
Yield to Maturity 5.92 %
Yield to Call 5.92%
|Moodys Rating Information|
|S&P Rating Information|
Additional Blyth Inc information such as financial ratios, Charts and News are available here.
Disclosure: I am long BTH.
Additional disclosure: Durig Capital's clients currently own these bonds.