5 BBB Rated Blue Chip Bonds That Buyers Should Be Wary Of

Includes: F, HCA, SHW, WHR, XRX
by: Holmes Osborne


BBB is the lowest rung of investment grade.

These five bonds should be downgraded or on the cusp of high yield and investment grade.

We look at assets like cash and receivables and liabilities like payables and debt.

Many economic reports have been discussing the amount of debt in our system and the BBB bonds can take a hit. BBB is the lowest rating of debt, AAA being the highest. We will take a look at five bonds that meet this criteria and how you should evaluate debt. Keep in mind that we are ten years into an economic expansion. If a company has not increased sales during this time, then how is it going to do in a recession?

We look at five main things: cash, accounts receivables, accounts payables, debt, and free cash flow. These are assets that are soon to be cash and liabilities that always must be dealt with. Free cash flow is basically net income plus write-offs like depreciation minus capital investments such as fixing pipelines or putting a roof on a building.

There are other things to look at such as: the attractiveness and ability to quickly sell a division, will a major shareholder help the company out, and hidden assets that can be sold to raise cash. A hidden asset may be a piece of property that shows on the books for far less than what it is worth.

The first is a Sherwin-Williams (SHW) bond. The cusip is 824348AV8, it matures 6/1/24, and the yield to maturity is about 4%. The company has $154 million in cash and $2.6 billion in receivables. The liability side has $2 billion in payables and $20 billion in debt. Yikes! Only $154 million in cash and $22 billion in payables and debt. Free cash flow has been very high and was about $1.6 billion last year. Still, we’re ten years into a housing recovery. When that ends, so will demand for paint.

The next bond is Whirlpool (WHR). The cusip is 96332HCE7, it matures 6/1/22, and the yield to maturity is about 3.7%. Whirlpool has about $1 billion in debt and $2.5 billion in receivables to $4 billion in payables and $11.6 billion in debt. So $3.5 billion to $15.6 billion in liabilities. I’ve seen worse but it’s a touch high. Free cash flow is about $600 million a year which is decent to address the debt. Whirlpool is right on the border of BBB and BB (high yield) in my opinion.

The next is HCA (HCA). The cusip is 404119BN8, the bond matures 3/15/24, and the yield to maturity is 4.84%. That’s a nice yield for six years. The hospital operator has $900 million in cash and $6.5 billion receivables to $2.5 billion in payables and a staggering $66.7 billion in debt. Wow. About $7.5 billion to $69.2 billion. Free cash flow is about $2.5 billion a year. No thanks. HCA is overrated, literally. The bonds should be BB rated at best.

The fourth bond is Ford (F). The cusip is 345397YG2, the bond matures 1/9/24, and the yield to maturity is almost 5%. If I could get a solid 5% return on a six-year maturity, I’d buy that all day, if I thought the risk was right. Ford has $25.15 billion in cash and short-term investments and $3.67 billion in receivables to $21.6 billion in payables and $165 billion in debt.

On that metric, the ratio is not bad but there are other things on the balance sheet that concern me such as another $40 billion in other liabilities. Free cash flow has been about $11 billion a year for several years. On that metric, the bonds are safe. Still, there is a reason that these BBB rated bonds are at the top of yield. The market sees risk.

Our last bond is Xerox (NYSE:XRX). The cusip is 984121CD3, the bond matures 5/15/21, and the yield to maturity is 4.6%. Xerox has $1.3 billion in cash and $1.3 billion in receivables to $1.1 billion in payables and $10 billion in debt. That’s a little high on the debt side. Free cash flow has been about $300 million to $400 million a year. It’s the income statement that frightens the market. Sales fell from $17.5 billion in 2014 to $12.25 billion last year. That will kill a bond’s price as it has done in this case.

Don't get me wrong, I like these companies. I want to see them exceed as they are old American blue chips and employ millions of people.

So here we have five great American companies that are blue chips or used to be. Most of these bonds are really pushing the envelope and probably ought to be downgraded. You can’t wait on the rating agencies because they are slow to act. The rating agencies put too much on a company’s name, not the actual financials. You really need to do your research when looking for bond yields. It’s nice that yields are up but be careful about what you are buying!

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

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.