Bonds are generally considered to be safer than stocks. Bonds are usually tied to company assets and creditors are generally higher up the food chain than ordinary shareholders when it comes to company liquidation and asset disposal. Having said that, there are some companies on the market with stocks that come with bond-like qualities, like The Coca-Cola Company (NYSE:KO), Wal-Mart Stores, Inc. (NYSE:WMT), Exxon Mobil Corporation (NYSE:XOM) and American States Water Co (NYSE:AWR). The bond-like qualities of these companies are their size, sustainable dividend payouts, histories and fiscal prudence.
The Coca-Cola Company (NYSE:KO) has a gearing — gearing is total debt dividend by shareholder equity — level of around 50%, however, interest costs were covered 24 times by EBIT at during the first quarter of this year. The company’s dividend payout is covered more than twice by operating cash flow indicating that the company’s sales would have to fall around 50% before the payout came under pressure — this would equate to nearly $6 billion a quarter, the same as the company’s total sales volume of Diet Coke. The Coca-Cola Company (NYSE:KO) has been paying a dividend consistently since 1920 and an investment in the company made 30 years ago would have returned 2515% to date.
Exxon Mobil Corporation (NYSE:XOM) is the biggest company in the world and unlike Apple Inc. (NASDAQ:AAPL), which briefly overtook Exxon as the largest last year, Exxon is going to keep the crown. One of Exxon’s key strengths is the fact that it’s boring, as result, the company’s shares are stable. Exxon has a very low level of gearing, at only 8% of equity; this means that the company’s financial position looks better than that of most company bonds. Furthermore, Exxon’s net operating cash flow totaled $56 billion during 2012, which covered the dividend payout 5.6 times. Investors could be worried that Exxon’s falling production from ultimately a finite asset will at some point in the future affect cash flows. However, the company’s production would have to fall more than 50% before cash flows came under significant pressures. Exxon Mobil Corporation (NYSE:XOM) has been paying and increasing its dividend payout every year for the past 30 years. The company has been around in some form since the beginning of the last century and dividends have always flowed to stakeholders.
American States Water Co (NYSE:AWR) looks like another stock with bond-like qualities and part of the reason for this is the company’s extensive dividend history, which stretches back 58 years. In addition, the payout has grown in line with inflation, a quality that bonds do not necessarily have. American States Water has a higher level of debt than those above but American States is a utility company, and a higher level of debt is expected. Interest costs are covered five times by EBIT and the company has grown net income 89% during the past five years, when many other business have been struggling — highlighting the company’s defensive nature. During the first quarter of this year dividend payouts were covered 4.5 times by net operating cash flow, indicating that the company’s income would have to fall 70% before payouts came under pressure, unlikely as the company’s customers would have to stop drinking water.
Why buy these companies?
Bonds are perfect for risk averse investors but they are also very constrictive. Interest rates on bonds are usually fixed, the debt always redeems at par ruling out any prospect for capital growth and longer duration bonds are highly susceptible to changes in the rate of interest.
Shares with bond-like qualities offer the same kind of security but the potential for both capital growth and dividend payouts that will grow in line with inflation and there is potential for special payouts, which makes these four dividend Goliaths above look much more appealing to the long term investor.
Foolish summary
Bonds are good assets and should form a part of every portfolio. However, these four stocks offer many of the positive aspects of owning a bond — such as reliable payouts and low market risk — without the undesirable effects, such as high sensitivity to interest rate changes and fixed redemption values.
The article Stocks with Bond-like Qualities originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO). Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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