Loan covenants on high yield debt are starting to loosen again. By some measures, the legal protections for junk bond purchasers are nearing the low levels of 2008. That’s a bad sign for investors. It might make sense to buy higher-risk equities that have no debt on the balance sheet, like Crown Crafts, Inc.(NASDAQ:CRWS), World Wrestling Entertainment, Inc. (NYSE:WWE), andNutriSystem Inc. (NASDAQ:NTRI).
A PIK Problem
Payment in kind (PIK) is a feature of a bond that allows the issuer to pay interest payments by issuing more bonds instead of using cash. Barron’s recently highlighted that 2012 saw the most issuance of PIK bonds since 2008, with another $2.4 billion in PIK bonds issued so far this year. Worse, more PIK bonds than ever before were issued in 2012 with the intent of paying dividends to equity owners. That’s another bad sign since that money wasn’t used for the betterment of the companies.
With bond yields at historic lows, it doesn’t make much sense to buy debt that is increasingly being structured for the benefit of the company and not the debt holder. An alternative is to buy equity in higher-risk, publicly-traded companies that have no debt. While there are still issues to consider, at least the equity deck isn’t stacked against you.
A Baby Company
Crown Crafts, Inc.(NASDAQ:CRWS) makes baby products, including bedding, bibs, and blankets. It’s a tiny company, with a market cap of around $60 million. However, its customers include giants like Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), and Toys R Us. And it has Licensing relationships with companies like Disney and Sesame Street.
The company’s top and bottom lines have been range bound over the last four years or so. However, the dividend has grown from a token $0.02 for the entire fiscal year in 2010 to $0.14 in fiscal 2012. It is currently at a run rate of $0.32 per year ($0.08 per quarter). Although that amounts to more than half of the company’s fiscal 2012 earnings, a debt-free balance sheet means it can be easily afforded.
Although U.S. births are trending lower, Crown Crafts, Inc.(NASDAQ:CRWS) has a solid market position and plenty of financial strength to keep paying dividends even if births continue at a low level for a while. And, if birthrates pick up again as the economy improves, financial results would pick up, too. The company’s dividend yield is around 5%, backed by a dividend that’s grown over the last few years.
Sport as Theater
World Wrestling Entertainment, Inc. (NYSE:WWE) is best thought of as a $700 million market cap media company, with live entertainment, television show, web site, video game, and movie assets. All of these products are built around the company’s wresting league.
World Wrestling Entertainment, Inc. (NYSE:WWE)’s revenues peaked in 2008, fell a bit, and have been relatively stagnant since. The company’s dividend has been greater than its earnings since 2006. Since dividends are paid out of cash flow, this isn’t impossible, but in WWE’s case, it hasn’t been a sustainable practice either. Dividend’s peaked at $1.44 a share on an annual basis and are now at a run-rate of $0.48 per year ($0.12 per quarter). With dividend payments still higher than earnings, future cuts can’t be ruled out.
However, the company has no debt and a material amount of insider ownership, both of which are supportive of the outsized dividends. The company’s media business, meanwhile, is a one-trick pony. As consumer tastes wax and wane, so, too, does World Wrestling Entertainment, Inc. (NYSE:WWE)’s fortunes. If demand for wrestling entertainment picks up, the company’s results and dividend paying ability will too. The shares currently yield over 5%.
Some Big Issues
NutriSystem makes and delivers complete meals to its dieters. That can be expensive, though that’s a cost that dieters incapable of successfully structuring their own meals are willing to pay. At least until economic times turned tough.
The company’s sales peaked in 2007 and have headed lower since. They are currently at about half of their peak. Dividends at $0.70 per share per year ($0.175 per quarter) have outstripped earnings for the last two years. Although there haven’t been any dividend cuts, the lingering effects of the 2007 to 2009 recession have punished the company’s financial performance and shares.
That said, for intrepid investors, this nearly 8% yielder has no debt and a notable position in the diet business. Weight loss is likely to gain in importance over time since the prevention of medical problems is the best way to keep overall costs down. Thus, NutriSystem looks to have a bright future if it can survive. Having no debt materially increases that likelihood.
High Yield Debt or Stock
With bond yields at historic lows and debt covenants loosening again, investors should strongly consider the alternative of debt-free, but risky stocks. Crown Crafts, Inc. (NASDAQ:CRWS) biggest risk is its small size, despite a fairly notable customer base. WWE relies solely on the demand for one form of entertainment and has a history of dividend cuts. NutriSystem has a struggling business that’s basically half the size it was just five years ago. However, they offer notable dividend yields and there’s no covenant risks.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article No-Debt High-Yield Alternatives originally appeared on Fool.com.
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