Seeking Income From AAA Rated Corporations

Includes: ADP, JNJ, MSFT, XOM
by: Kendall J. Anderson, CFA

Last week, the U.S. taxpayers borrowed $35 billion through their agent the U.S. Treasury Department with a promise to repay our lenders five years from now. The cost to those of us who pay taxes is just 0.937% per year, the lowest cost we have ever paid to borrow money for this period of time. What a deal! A deal for the taxpayer, but is it a deal for the lender? Let’s see, for every $1,000 they lent us, we will pay them $4.685 every six months. If our lenders wanted to receive $12,000 per year in interest, they would only have to lend us $1,280,683.03.

I suppose, if someone has an extra million and they’re more worried about losing their principal than earning interest, lending those funds to the U.S. taxpayers will do the job. After all, Standard & Poor’s does give the U.S. taxpayer a AA+ credit rating. For your information, S&P describes a AA rating as: “An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.”

However, even with the AA rating, many economists are saying that the U.S. taxpayers are so far in debt that they just may not be able to pay the interest on these obligations, let alone the principal when due. So instead, maybe we should only take a chance on a AAA rated company. According to Standard & Poor’s a AAA rating is: “An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong”.

There are only four U.S. corporations that S&P considers extremely strong, strong enough to hold a AAA rating. Those four are Automatic Data Processing (NASDAQ:ADP), Johnson & Johnson (NYSE:JNJ), Microsoft (NASDAQ:MSFT) and ExxonMobil (NYSE:XOM). The problem is, none of those companies need to borrow our money. All of them are generating a huge amount of cash from their businesses well in excess of the expenses needed to operate and grow. Part of this excess cash is given back to the owners of the business in a dividend payment.

Yes, dividends are not guaranteed like a Treasury note, but, we should remember that American companies are not so quick to change a dividend payment once it is started. Companies will do almost anything they can to not lower or suspend a dividend payment. If a U.S company reduces or suspends their dividend without extreme financial distress it can devastate the stock price, taking years to regain the investment community’s confidence, something no shareholder (including insiders) desires.

Blue chip companies not only pay their dividends, but they also have a tendency to raise their dividend payment annually, even during the years where business is not booming. Our four AAA rated companies are a great example. The following table reflects their dividends and changes in dividends paid over the past ten years.

Dividends Paid Per Share by Year

Auto. Data Proc.


Johnson & Johnson (JNJ)




























































Earning interest from bonds may seem to be the safe approach to seeking income. But consider this: If you took the same $1,280,683.03 invested in the 5 year Treasury note and instead invested $320,200 (plus or minus a few dollars in each of our AAA rated companies), your dividends would be $38,878, which is over three times the amount of cash returns you would earn from the taxpayer. Is the risk of owning these companies three times as great as lending funds to the taxpayer? Is the possibility of a dividend cut in the next five years so great that the excess cash from the dividends will not equal the amount of interest earned on the Treasury? Will these companies never raise their dividend payment again?

As an owner of all four of these companies I believe the potential reward is worth the risk.

Disclosure: I am long ADP, JNJ, MSFT, XOM. I own shares of all companies referenced. Any opinion and/or information contained in this commentary is derived from sources believed to be reliable, but Kendall J. Anderson, CFA or Anderson Griggs Portfolio Management cannot make representation as to its accuracy or completeness. This commentary does not specifically address individual investment objectives and any conclusions may not be suitable for you. As in all common stock investing you can incur a profit or loss of capital. Past performance should not be taken as an indication or guarantee of future performance.

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