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.