Midas: FirstGroup bonds good value at 6%
This week, Midas looked at Tesco's new corporate bond offer. Here the column looks at other options.
On the right track: FirstGroup operates First Great Western
On the Stock Exchange, certain bonds look more attractive than others. Many have risen in price substantially since they were launched and are now rather expensive. But some still offer good value.
Travel business FirstGroup is a case in point. It launched a bond issue in 2003, maturing in 2019. The bonds pay 6 1/8% interest and the current price is £102.
Investors can buy or sell at any time until 2019, but if they buy now and keep their bonds for the next eight years, they will receive £100 for every £102 invested.
That may sound unappealing but even at £102, the bonds yield 5.9% - comfortably above most savings rates found on the High Street.
FirstGroup runs First Capital Connect, First Great Western and a host of other train and bus services. It is a stable, solid business, so the chances are it will be able to repay investors in full when the bonds mature.
Imperial Tobacco bonds are also worth considering. These mature in 2018 and are currently £108.50, so investors buying now and holding them to maturity will receive eight% less cash in seven years than they pay today.
In the meantime, however, they will be paid a 6.25% coupon or interest rate, which, even at the £108 price, works out at a yield of 53/4%.
Imperial is one of the world's leading cigarette makers and, despite crackdowns all over the world, people keep on smoking. Imperial is most unlikely to hit the buffers by 2018, so the bonds could provide a comfortable income stream.
Midas verdict: The Stock Exchange retail bond market has been growing steadily over the past year and several other companies are likely to launch issues if the Tesco deal is successful. The Exchange is also keen to encourage smaller firms to tap this market. Their bonds will be riskier than FTSE 100 groups but they will pay higher interest rates to compensate.
Shares tend to offer more capital appreciation than bonds, but bonds offer the comfort of a fixed interest rate. This market will almost certainly continue to expand and investors should take advantage.
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