Last week, S&P and Fitch welcomed Nokia Bonds to the world of junk, downgrading the company’s senior unsecured debt to BB+ from BBB-. This followed the previous week’s downgrade of Nokia by Moody’s. Moody’s, however, did keep the senior unsecured debt in investment grade territory at Baa3.
As you may be aware, Nokia’s stock has gotten absolutely pummeled in recent years, recently trading in the mid-$3s versus more than $42 in November 2007 and over $9 just one year ago. Nokia does have plenty of challenges. However, given the company’s partnership with Microsoft and what Moody’s describes as a “strong liquidity position and capital structure,” I’m not surprised by the commentaries I’ve read calling for investors to purchase the stock.
If you are an investor looking to bottom fish in Nokia’s stock, consider this alternative as well: take 50% of the total amount you are willing to invest in the company and purchase the May 15, 2039 maturing 6.625% coupon senior unsecured note, CUSIP 654902AC9, currently asking 81.707 cents on the dollar (8.338% yield to maturity before commissions). With the other 50% of your potential investment in Nokia, purchase the stock.
At 81.707 cents on the dollar, the current yield on the aforementioned Nokia Bond is 8.108% (before commissions). On a $10,000 face value investment in the bond, the current yield would be calculated as follows: $662.50 annual income divided by the $8,170.70 investment ($10,000 face value purchased at 81.707 cents on the dollar). For 2012, the annual dividend for Nokia, after foreign dividend withholding is taken into account, is roughly 5% at the current share price. Given today’s dividend and bond yields, a 50% allocation to the senior unsecured note mentioned above and 50% to the stock would provide approximately 6.554% in income on the entire investment on an annual basis. This would also still allow for upside from the appreciation of the stock you purchased with 50% of your investment.
If income is your focus and you don’t mind giving up more of the upside from the stock, opportunistically selling covered calls can add to the 6.554% in annual income mentioned above. By selling a covered call on Nokia, an investor would be taking on the obligation to sell his or her stock at a certain price determined by the call seller (you, the investor). For instance, at the moment, Nokia’s January 19, 2013 $6 call can be sold for 15 cents. The investor evenly splitting his or her investment between the Nokia Bond CUSIP mentioned above and Nokia’s stock and simultaneously selling that $6 call for 15 cents would create an 8.609% yield over the next 12 months. The position would also allow for upside on the stock to $6 per share, more than 64% above its recent close of $3.65.
This is just one of many examples of how investors can think beyond just buying stocks when investing in companies and instead create an investment in a company that combines multiple layers of the capital structure. Of course, the 50/50 split I mentioned above can be adjusted in any number of ways to change the volatility of the investment, the annual income, and/or the potential return. If you decide an investment in Nokia is a good use of your money, don’t forget to think about other combinations of allocating your capital between the bond, the stock, and perhaps even the options in order to find the one that’s best for you.
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