Long-Term Telecom Bond Issue Promises High Yield With A Margin Of Safety

| About: Verizon Communications (VZ)

The Chesapeake & Potomac Telephone Company of Maryland, owned by Verizon Communications (VZ), has bonds on the fixed-income market that promise a relatively high yield to maturity of 6.402% (as of July 5, 2012) with a substantial margin of safety. Though the bonds are callable, the call schedule indicates that May 2013 is the next date of potential call. CUSIP for these bonds is 165069AS4.

After investigating all the factors at play, it appears as if this long-term telecommunications fixed-income security is one worth the investment for those with capital to put away for the next 11 years who want a safe yield. The coupon is 7.15% with payments in May and November, and current yield for these bonds is 6.761%. The current offer is for 24 bonds at a price of 105.755 per bond, resulting in a total payment of principal of $25,381.20 plus some accrued interest of $328.91 to bring the total cost of purchasing all these bonds to $25,710.11.

For the long-term investor with $25,710.11 on hand, there are few opportunities on the market that offer this much potential risk-adjusted return. If we take a look at the credit ratings of Verizon Communications, we see a great deal of stability and security for fixed-income investors. Verizon's management, in the words of analysts at Moody's, is actively seeking a strong balance sheet and ample liquidity. EBITDA margin has increased compellingly over the last several years, moving from 32.4% in 2006 to 32.7% in 2007 and 33% in 2008. Debt/EBITDA and free cash flow ratios also signal good health of the parent company with respect to credit status.

Worst-case scenario: The bonds are called next May, resulting in an immediate return of principal with a decent coupon payout in the meantime. If this doesn't happen, investors in these bonds are set for the next 10 years with respect to yields. If it does, the one certainty of the market is that more opportunities will come along. Though this isn't a huge bond play, it does represent a stable, long-term, high-yield opportunity in an era of bond market volatility and rock-bottom returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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