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NEW YORK (
TheStreet) - If there's been any investor takeaway from the
Federal Reserve's newest round of
monetary easing, it's that debt markets are booming and stock markets, which recently touched on post-crisis highs, are on life support.
For the world's most sophisticated investors like private equity and hedge funds, a dynamic of roaring bond markets and fear-laden stock markets presents opportunity, as buyouts and investments in complicated debts become easier to manage. The average stock investor; however, has likely been hard pressed to find a benefit from the Fed's policy to
promote record cheap money.
But for investors watching news announcements from the likes of hospitals giant
HCA(HCA - Get Report), industrials conglomerate
LyondellBasell(LYB - Get Report), consulting expert
Booz Allen Hamilton(BAH),
Domino's Pizza(DPz), and pharmaceuticals specialist
Warner Chilcott(WCRX) there's a clear link between bubbling debt markets and stocks. Namely, those companies are using cheap money to fund big dividends paid to private equity investors and ordinary shareholders.
See why LyondellBasell shows investing in cyclical stocks can have a countercyclical payoff.
As investors chase the higher yields of bond offerings by debt loaded companies rated at sub-investment grade, or 'junk,' dividend hungry stock investors may want to pay attention to the phenomena. Because private equity giants have IPO'ed many large pre-crisis buyouts and are using spongy bond markets to fund billion dollar dividends, investors can look at those companies as a way to bridge a gap between Fed fueled debt markets and stocks.
In recent months, the five aforementioned companies have used junk debt offering to pay billion dollar-plus dividends to shareholders, which go to private equity holders and the investing public on a pro-rata basis. As 2012 draws to an end, analysts at Evercore Partners
expect satellite giant
SiriusXM(SIRI - Get Report) to pay a big dividend to investors, which includes large minority holder
Liberty Media(LMCA). Meanwhile, publicly traded companies like
Kosmos Energy(KOS) and
Dollar General (DG - Get Report) may be in a position to soon pay longtime private equity backers and investors a payout. Other private equity backed public companies like
Kinder Morgan(KMI) and
Roundy's(RNDY) already pay 4% dividend yields.
In an Oct. 16 Moody Ratings report, the bond rating agency highlights that junk bond issuance by corporations owned by private equity to fund investor dividends recalls the heady days of the credit boom. "Recent debt-funded dividend recapitalizations show investors' willingness to accept structures that prevailed prior to the credit crisis," writes Moody's senior vice president Lenny Ajzenman in the report.
In a follow up conversation, Ajzenman noted that debt-fueled private equity dividends signal a general weakening of credit quality. When pressed on what it means for stock investors, Ajzenman says dividends may have the same appeal as the bond offerings that fund the payouts - namely an investor hunt for cash yields.
Obviously, there are big risks for both bond and stock investors chasing low quality yields. Ajzenman highlights increasing leverage, less financial flexibility and whether operating earnings can outweigh interest payments were yields to rise, as the biggest issues for investors to consider.
James Krapfel, an IPO analyst with Morningstar highlights that, in certain instances, if private equity owners are IPO'ing a company but intend to remain long-term investors, their familiarity with high finance can play to the benefit of ordinary shareholders. Still, Krapfel says chasing big private equity dividends - known as dividend recapitalizations - generally is for fast-money investors, who fall outside of Morningstar's purview.