Question.3185 - Find 2 companies with debt and that pay dividends. You can use the following to find a company http://www.google.com/finance/stockscreener. To find the company’s information go to. http:// www.sec.gov/edgar.shtml. Add the criteria of long term debt. Look at the long term debt to assets to secure the company has debt. Determine the coupon price, the length of maturity, and yield to maturity. Calculate today’s price of the bond. List the pertinent info on the bond you chose then calculate todays price of the bond Which bond is receiving a higher price? From a time value of money concept what does each rate say about the viewpoint on the time value of money? Which company has a better credit rating. Explain. Based on credit rating, which company do u believe the bank feels more secure about paying back a loan? Why does the bank charge more interest for one company than the other? What does the credit rating say to an investor? I. Introduction- Two companies chosen that encounter debt II. Company 1 A. debt accumulated B. dividends C. long term payout III. Company 2 A. debt accumulated/ coupon price B. dividends C. long term payout and todays price of the bond IV. Pertinent Info pertaining to vanilla bonds 1. Price calculated from each company 2. Which bond receives higher price 3. Credit ratings A. AAA rating B. BBB rating C. Junk rating V. Investor alternatives to incorporate bonds 1. Annuities/Perpetuities 2. Types of bonds to choose Conclusion
Answer Below:
The company chosen which has both dividend and debt are 3M Co. and A. O. Smith Corporation. Brief details of the two companies are as follows:- 3M Co. 3M is a company which has a vast diversification in technology and which makes its presence felt almost all over the world. The company does business in various sectors like health care, safety and security, display and graphics, industrial and transportation etc. This company is a leader in the business of manufacturing several products for the global market around the world which it serves. Most of the products manufactured by 3M require expert knowledge in the development of its product, manufacturing of the product and the way it is marketed to various industries and nations. Their products also need to face severe competition with the other products that are produced and sold by the companies which are way ahead and advanced technologically. AO Smith Corporation AO Smith Corporation is a company which leads the world in the manufacture of water boilers and heaters globally. The markets which it serves include both residential and commercial and its principal place of business is United States. This company is growing very rapidly and is showing a cery strong presence in the international market. The company is a leader in manufacturing of residential water heater market and offers a very high quality of electric heaters, gas heaters as well as boilers. The company has opened its branch offices worldwide starting from Europe and extends upto Asia and it also covers the whole of America. Both the above mentioned company is listed and are actively traded on a stock exchange. Their stock details are as follows: 3 M Co.A. O. Smith Corporation Market Price=106.4273.59 Range=105.10 - 106.49 73.33 - 74.17 52 week=81.99 - 106.8842.06 - 74.86 Vol / Avg=2.41M/2.45M 199,878.00/289,688.00 Mkt cap73.43B3.40B P/E16.8421.06 Div/yield0.63/2.390.20/1.09 EPS6.323.5 Shares689.99M46.17M Beta0.880.99 Inst. Own70%83% (in millions) Description Currency/ Fixed Vs Floating Effective Interest Rate Final Maturity Date20112010 Eurobond (775 million Euros)Euro Fixed4.30%20141,017 1,055 Medium-term note ($1 billion)USD Fixed1.62%2016992 - Medium-term note ($850 million)USD Fixed4.42%2013849 849 Medium-term noteUSD Floating0.00%0- 806 30-year bond ($750 million)USD Fixed5.73%2037747 747 Medium-term note ($500 million)USD Fixed4.67%2012500 500 Eurobond (250 million Euros)Euro Floating1.92%2014347 357 30-year debenture ($330 million)USD Fixed6.01%2028348 349 Convertible notesUSD Fixed0.00%0- 226 Japan borrowingJPY Floating0.00%0- 142 Canada borrowingCAD Floating0.00%0- 101 Floating rate note ($97 million)USD Floating0.22%204197 100 Floating rate note ($59 million)USD Floating0.20%204459 60 Other borrowingsVarious0.70%2012-204091 76 Total long-term debt5,047 5,368 Less: current portion of long-term debt563 1,185 Long-term debt (excluding current portion)4,484 4,183 Now, let us analyze the performance of the company with respect to dividend and debts. The details of Debt structure of 3M Co. are as follows:- Credit Rating of 3 M Co. The leading agencies involved in the work of credit rating have assessed the credits taken by the company and the ability of the company to pay back the credits taken by it. On the basis of this assessment the agencies assign ratings to the company. This company has c credit rating of AA- right now, with a stable outlook, from Standard & Poor’s and an Aa2 credit rating, with a stable outlook, from Moody’s Investors Service. The evaluation of the credit rating agencies is based on a number of factors, which include financials, weakness, future opportunities, financial strength, financial risk, Business risk, as well as transparency with rating agencies and timely filing of financial reports with the statutory authorities. Because of the good rating assigned to the Company, the Company was able to lower the borrowing cost and it facilitated access to a large number of lenders. It is to be noted that failure to maintain the current ratings level would adversely affect the Company’s cost of funds and could adversely affect liquidity and access to capital markets. Dividend Trend Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ($ million) Debt and Lease Commitments20122011 Bank credit lines, average year-end interest rate of 3.8% for 2012 and 6.8% for 2011 9.46.2 Revolving credit agreement borrowings, average year-end interest rate of 1.3% for 2012 and 1.8% for 2011115330 Commercial paper, average year-end interest rate of 1.2% for 2012 and 1.3% for 201139.327.7 Term notes with insurance companies, expiring through 2018, average year-end interest rate of 6.0% for 2012 and 5.9% for 201149.868.3 Canadian term notes with insurance companies, expiring through 2018, average year-end interest rate of 5.3% for 2012 and 201130.229.4 243.7461.6 Less long-term debt due within one year18.618.6 Long-term debt225.1443 Divid end USD 1.32 1.44 1.68 1.84 1.92 2.0 2.04 2.1 2.2 2.36 Payo ut Ratio 43.7 38.4 40.4 36.4 34.3 40.9 45.1 37.3 36.9 37.3 The above table shows the increasing trend of Dividend amount paid by the company to its shareholders, however, the payout ratio was generally in the range of 34 to 43% of the Profit. The details of Debt structure of A. O. Smith Corporation are as follows:- Credit Rating for A. O. Smith Corporation. While issuing bonds, the company goes for the credit rating of its bonds issue and company has in the past received good credit rating from the reputed credit rating agencies. The rating of the company are based on the number of factors like the timely payment of interest, confirm orders in hand, stable financial ratios, future prospects of the company and the trend of the other firms in the same industry. Dividend Trend of A. O. Smith Corporation. Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Dividen d USD 0.39 0.41 0.43 0.44 0.47 0.49 0.51 0.54 0.6 0.72 Payout Ratio 33 52.5 41.6 26.8 24.6 27.4 22.7 43.6 25.1 20.6 The Company has paid dividends for 73 consecutive years with payments increasing each of the last 21 years. The total dividends paid were $.72 per share in 2012 compared with $.60 per share in 2011. If we properly analyze the dividend trend of the Company, we can opine that the Company has paid dividend regularly to its shareholders and with increasing trend. This can also be seen from the graph below: Conclusion On analyzing the financials of the two companies, we can say that 3M has a better credit rating as compared to AO Smith Corporation and will be able to service its debt obligation in a better and timely manner. A bond with a higher credit rating trades at a higher price. The price of the bond can be calculated by discounting the future coupon and principal repayment of the bond. Based on different risk, return, coupon and credit rating assigned to bonds, it can be divided into various types like US Government bonds, Municipal bonds, corporate bonds, zero coupon bonds. Similarly, based on the forms of payment of Dividend, dividend can be categorize as Cash dividends, Stock dividends, Property dividends, Interim dividends, etc.More Articles From Finance
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