Monday, March 22, 2010

Buffett isn't the only one borrowing close to Uncle Sam's rate...(DELL,JNJ, LOW, PG)



A Bloomberg article pointed out that Berkshire Hathaway (BRK.A, BRK.B) is able to borrow for less than the United States of America. Other companies able to borrow for less than the USA are Procter & Gamble(PG), Johnson & Johnson(JNJ) and Lowe's(LOW).

From Bloomberg:

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group Inc. in Baltimore. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”
I have a question. WHY IS THIS SHOCKING? You don't even have to go as far as those top-notch US companies to find yields similar to the 2 year treasury. Take Dell (DELL) for instance. They sell a commoditized piece of hardware and struggle to produce operating cash flow in excess of net income, yet they borrow amazingly close to rates that the USA does, with recent 2year Dell debt trading to yield 1.09%.
In 2010, the USA will collect about $2.15trillion dollars in the form of taxes, fee's etc., with which it will pay bills. Interest expense is estimated to be about $209 billion according to the Congressional Budget Office, or 9.7% of revenues.
Compare that to Dell, with 2009 revenue of $57billion and 2009 interest expense of $93million. Dell's interest amounted to 16hundredths of one percent of revenue. In rough terms, Dell is 60 times better off in its ability to pay interest payments than is the government.

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