AstraZeneca: New Bonds Sign Of Times

Sep.17.12 | About: AstraZeneca Group (AZN)

A long time ago we did not have computers that we carried around with us everywhere. If you wanted a stock quote you could open up the newspaper to find the price of a stock from the day before.

Of course the times have changed. Today it seems investors are taught exclusively about stocks, and bonds are not subject to promotion. Investors can check their iPhone at anytime to see how their stocks are doing. Of course they could check bonds too, however the popular finance news is dedicated to stocks.

In a recent article, extraordinary Seeking Alpha author Chuck Carnevale determined that, "it is more relevant to think of a market of stocks than it is a stock market." In the process of teaching finances it may be appropriate to educate investors that there is a market of financials. One that contains stocks, bonds, mutual funds and treasuries.

AstraZeneca (NYSE:AZN) New Corp. Bonds

Earlier this year I liked AstraZeneca stock and currently the dividend is still high (with caveats explained below.) In the past few days London based AstraZeneca plc issued $2B in new bonds. Including 30-year senior notes that mature September 18, 2042.

credit rating price yield
Astrazeneca Plc Sr Nt 4% 2042, Cond Call, Make Whole Call (cusip: 046353AG3) continuously callable A1 $99.75 4.01%
Click to enlarge

One advantage to these bonds is they should have a more consistent yield than the company's stock. The drawback is that higher credit quality bonds can be found that yield over 5% more in a similar time frame.

Sign of Times

During the late 1990s the market of stocks experienced unprecedented gains. The news reported a few times on grade schoolers who turned a few thousand dollars into larger sums, with stocks.

To date I have not seen any such report on bonds, even though they have performed very well recently. The reason is there is no equivalent to "stock promotion" in the world of bonds. The problem is promotion of stocks can not fully prepare anyone to build a sound portfolio of financials.

I spent a while going over a recent Seeking Alpha series of articles, having to do with 60/40 asset allocation. The series goes back to Mythbusting: Young Investors And Bonds, this sentence sums up Mr. Tucker's article well:

... the reality is that fixed income can play an important role in any portfolio, regardless of the investor's age.

In order for stock promotion to succeed it often excludes bonds. Because the more in the dark new investors are, the more money they can throw into the stock market. While over the long term fixed income can generate cash that could be used to further invest.

Essential is Strategy

Due to Mr. Carnevale's reversal of words in the phrase "market of stocks," I thought to the scripting George Lucas used for the Jedi Master Yoda who speaks in what may appear to be a similar word reversal dialect.

Already know you that which you need.

-Yoda (Star Wars Episode VI)

Production Still of Yoda and George Lucas

Mr. Carnevale's concept of a market of stocks can be applied with great wisdom to many aspects of investing. I was about to write "strategy is essential," however instead I wrote "essential is strategy." If it sounds a little Star Wars-esque it could be because George Lucas is indeed a very wise screenwriter. (Or 'wise is George Lucas.') Any Star Wars fan knows that Yoda's way of speech may sound different, however it makes perfect sense. A "market of financials" may sound different also, however it makes perfect sense.

In some instances the first word relates as much to the next - as it does when the order is reversed, though the subject takes on a new perspective. When we go to the market for food, often we go for the food, not to be at the market. When we go to invest, we are going for the financials, not to be at the market.

This does not negate the importance of the market, merely it emphasizes the importance of content. Herein lies the issue with the new AstraZeneca senior notes. Rates are low, companies that want more money can raise funds for less, however in this instance AstraZeneca's 30-year yield seems low considering their credit rating and outlook.

A modern strategy must contemplate the fact that rates will most likely go up, and that it may be wise to target 2018-2021 with short-term bonds. Additionally long-term bonds that appear stable may be worthy if they meet a few criteria.

  • Corp. bond yield is greater than stock's dividend
  • Corp. bond's fixed income can be used (before rates go up) to increase overall yield

AstraZeneca's Dividend

AstraZeneca pays an irregular dividend twice a year, at different yields. Some financial sources do not take this into account, however Morningstar (NASDAQ:MORN) does. The company's stock currently yields 6% in dividends however charts such as this show 3.79% because AstraZeneca pays a different rate for each of the two annual dividends.

AZN Dividend Yield Chart

AZN Dividend Yield data by YCharts

Now let's compare AstraZeneca's dividend yield to the company's debt / equity ratio.

AZN Dividend Yield Chart

AZN Dividend Yield data by YCharts

On July 4, 2012 Moody's changed its outlook on AstraZeneca to negative, Moody's downgraded AstraZeneca from Aa2 to A1 in 2007. The stock has done very well since early June 2012.

Since the recent QE3 annoucement it is easier to find long-term bonds with better credit ratings that yield more. Take Berkshire Hathaway (NYSE:BRK.A) 30-year bonds due in 2040 for instance:

credit rating price yield
Berkshire Hathaway Fin Corp Gtd Srnt 5.75% 01/15/2040, Make Whole Call (cusip: 084664BL4) not call protected, not continuously callable Aa2 $122.41 4.34%
Berkshire Hathaway Fin Corp Fr 4.4% 05/15/2042, Make Whole Call (cusip: 084664BU4) not call protected, continuously callable Aa2 $103.18 4.21%
Click to enlarge

The Market of Financials

As federal financial pressures continue, we anticipate that some policymakers will look to the pharmaceutical industry for further cost savings in much the same way that they did during deficit reduction discussions.

AstraZeneca 2011 Annual Report

In order to truly understand what those stock tickers actually mean investors must look to the company's financial report and when applicable to the company's debt.

A strategy should consider a company's new debt relative to current stock price and dividend yield. When searching for a long-term bond (not short-term) the difference between the fixed income yield and company's dividend history is important to consider.

On the other hand short-term bonds may yield less than that company's dividend, because bond prices have soared. Whiie investor dollars are committed for less time.

It is important to realize:

  • AstraZeneca's dividend yield is relative to its stock price
  • AstraZeneca like any company could raise (or lower) its dividend
  • Just because a bond is continuously callable it may not be in the company's interest to call them.

In order to call their bonds AstraZeneca would need to come up with all the cash necessary to repay bondholders. There would be two ways to do this (excluding a default,) the company could use available cash, or the company could refinance their debt.

Currently it makes more sense to consider Corp. bonds that don't have a negative credit outlook, along the lines of Berkshire Hathaway. This does not mean I don't think AstraZeneca is a good company. However in terms of equity and debt, it is not as good of a deal as it was earlier this year.

Hopefully more and more new investors consider the wisdom presented in Mr. Carnevale and Mr. Tucker's articles. This does not mean go out and buy stocks or bonds without considering important factors. However to only think of investing in the "stock market" versus a market of financials could be short sighted. Especially if you are trying to build balance over the long-term.

This article is intended to be educational and is not a recommendation to buy or sell. Investors should consult an advisor of finances in order to determine a course of action. If you have any thoughts pertaining to AstraZeneca's equity or debt please comment below.

Disclosure: I am long AZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.