NIKE, Inc. (NYSE:NKE)’s capital structure is only financed 2.9% by debt. As a result, Nike’s bond offerings are not nearly as extensive as McDonald’s Corporation (NYSE:MCD) or Microsoft Corporation (NASDAQ:MSFT). The following image from Morningstar lists all of Nike’s outstanding bonds.
| Name | Maturity Date | Amount $(Mil) | Credit Quality | Price | Coupon % | Coupon Type | Callable | Yield to Maturity % |
|---|---|---|---|---|---|---|---|---|
| Nike | 5/1/2023 | 500 | — | 95.8 | 2.25 | Fixed | No | 2.74 |
| Nike | 5/1/2043 | 500 | — | 92.3 | 3.625 | Fixed | No | 4.07 |
| Nike Inc (NYSE:NKE) Mtn Be 5.15% | 10/15/2015 | 100 | High | 109.1 | 5.15 | Fixed | No | 1.22 |
| Nike Inc Mtn Be 4.7% | 10/1/2013 | 50 | High | 102.5 | 4.7 | Fixed | No | 0.19 |
As seen by Morningstar’s chart below, NIKE, Inc. (NYSE:NKE) may be a good long term buy and hold for growth given its market dominance, revenue growth, operating efficiencies, and low beta of 0.78. However, it seems to be overvalued. For example, its total enterprise value is only about $51.4 billion whereas its total market cap is about $55.04 billion. However, investors must take Nike’s capital structure into consideration. It is barely financed through debt and is a large growth stock.
Regardless, investors should avoid Nike bonds.
Lower grade, better choice
Lower grade bond prices are not as strongly correlated to interest rate increases as higher grade bonds. As a result, investors may look toward lower grade bonds given the market condition.
General Motors Company (NYSE:GM), for example, only has a BB bond rating. Due to its duration, General Motors Company (NYSE:GM) bond holders are more likely to avoid large paper losses if interest rates rise. For example, if rates increase from current levels of about 2% to 3%, General Motors Company (NYSE:GM) bond holders would only recognize a price decline of about 7%. As seen in the above instance, Build America Bond ETF bond holders would notice a 10.7% drop.
Conclusion
The Fed’s next steps are unknown. However, at the slightest upward movement of interest rates, bondholders may try to pitch investment grade bonds. Therefore, income seeking investors who want to avoid paper losses should consider REITS or lower grade bonds like General Motors Company (NYSE:GM).
Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends General Motors Company (NYSE:GM), McDonald’s Corporation (NYSE:MCD), and NIKE, Inc. (NYSE:NKE). The Motley Fool owns shares of McDonald’s, Microsoft Corporation (NASDAQ:MSFT), and Nike.
The article Boom or Bust, You Decide originally appeared on Fool.com.
Brendan 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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