Thursday, November 20, 2014

Months' Payables Oustanding

Days' payables outstanding is frequently used to determine if a company pays its bills slowly, yet for for some companies, months' payables outstanding may be a better measure. CFO recently discussed 45 publicly traded companies that had an average days' payables outstanding of 212.3 days. The longest had a days' payable of 585.9 days, or almost 20 months!  Although the article touts a long payables period as beneficial because "the company is able to deploy cash to other uses," it is also forcing the company's suppliers to finance part of the company's operations.

Monday, November 17, 2014

Interest Rate Risk

So far this year, investors have poured $113 billion into investment grade bond mutual funds. While such bonds appear to have a relatively low default risk in the current environment, the YTM on these bonds is close to a record low. The Federal Reserve has indicated that it plans to increase the Fed Funds rate, which will increase corporate borrowing rates as well. You should also be aware that the lower the current YTM, the greater the interest rate risk. Consider, in May and June 2013, investment grade bonds dropped five percent because of an increase in interest rates. Therefore, if interest rates do increase, investors may be in for a shock.

Ford's F-150

Ford, which manufactures the best-selling F-150 pickup, is making a big bet on aluminum. The company began manufacturing F-150s today that are entirely made of aluminum. The switch will lower the weight of the pickup by about 700 pounds, increasing full economy. From a capital budgeting perspective, we appreciate that the author of the linked article accounted for the erosion of 90,000 units this year, with an associated sales figure of $3.6 billion.

Wednesday, November 12, 2014

Apple's Euro Bonds

Apple recently offered €2.8 billion ($3.5 billion) in bonds. The bonds are equally divided between an 8-year maturity issue and a 12-year maturity issue. The notes will pay 30 basis points and 45 basis points more than the benchmark interest rate, respectively. The yields of 1.082 percent and 1.671 percent are some of the lowest in history for these maturities. The euro bond issue will allow Apple to tap into its enormous overseas cash horde and the proceeds will likely be used for dividends and share repurchases.

U.S. Corporate Overseas Cash Grows

U.S. corporate cash balances held overseas have reached $2.1 trillion, a 600 percent increase over the past 12 years. In comparison, the domestic U.S. corporate cash balance is $1.9 trillion. The major reason for the growth in international cash balances is the U.S. tax policy that taxes repatriated profits at the difference between the local tax rate already paid and the U.S. corporate tax rate, which is one of the highest in the world. Repatriating overseas cash does not necessarily mean the cash will be used for investment. One study indicates during the 2004 tax holiday, every dollar repatriated generated an $0.80 dividend payment and $0.15 share repurchase. While politicians may decry the lost corporate tax revenue that arises with a repatriation tax holiday, personal income taxes balloon with the increased dividends and share repurchases. 


Bowie bonds were created in 1997 when the current and future revenues of the 25 albums David Bowie  recorded prior to 1990 were pooled and sold as bonds. Prudential Insurance, which purchased the entire $55 million bond issue, received a 7.9 percent coupon over the next 10 years. One advantage of such an asset is the correlation with more traditional assets, like stocks and bonds, tends to be low. Now, a marketplace exists to sell music royalties and the cash flows from other intellectual property in auctions for as low as $4,000 each. Yields on these instruments is as high as 20 percent, although we should warn you that any yield that high does entail significant risk.