The recent across-the-board selloff seen in debt markets is naturally boosting corporate bond yields.
As it is, it wasn't too hard to find tech companies that -- given their balance sheets and cash-flow profiles -- carried very little default risk but nonetheless had debt due within the next few years that yielded over 4%, if not 5%. And certainly, the recent selloff witnessed by bond markets hasn't done anything to hurt those yields.
Here's a look at a few financially-sound tech firms that possess debt that yields over 4% and is due in the next 4-to-8 years. The yield data is supplied by FactSet. For comparison, 3-year, 5-year and 7-year treasuries currently yield 2.99%, 3.07% and 3.18%, respectively.
Balance Sheet: Seagate ended its June quarter with $1.9 billion in cash and $4.8 billion in debt.
Why Seagate's Debt Looks Safe: Seagate produced $1.7 billion in free cash flow (FCF) in fiscal 2018 (it ended in June), and is expected by analysts to produce similar amounts in fiscal 2019 and 2020. Those estimates could be too optimistic if (as is possible) Seagate's hard drive business is cannibalized by solid-state drives (SSDs) at a faster rate than analysts project.
However, even if that happens, Seagate should still produce significant amounts of FCF and have little trouble servicing its moderate debt load. Seagate and Western Digital's (WDC) possession of a near-duopoly in the hard drive market has kept a lid on price pressure, cloud-related hard drive demand continues growing and (though its SSD share is a lot lower than its hard drive share) the company does have some SSD exposure.
Bond Yields: On a YTW basis, Broadcom (AVGO) has bonds due January 2023 that yield 4.16%, bonds due January 2024 that 4.3% and bonds due January 2025 that yield 4.51%.
Balance Sheet: Broadcom ended its July quarter with $4.1 billion in cash and $17.6 billion in debt. The company, it should be noted, plans to raise debt to help pay for its pending $18.9 billion purchase of software firm CA Technologies.
Why Broadcom's Debt Looks Safe: Much like the Lannisters in Game of Thrones, Broadcom has earned quite the reputation for paying its debts. The company has used debt to finance the purchase of a long list of chip and hardware firms over the last five years, and has paid down a lot of it as it used cost cuts, asset sales and price hikes to help make the deals pay off.
Broadcom is expected to produce $8.4 billion in FCF in fiscal 2018 (it ends in October), and (not counting the boost that will be provided by the CA deal) $8.7 billion in fiscal 2019. Given its track record, odds are good that Broadcom will be able to keep growing its cash flows in future years.
Bond Yields: On a YTW basis, Qorvo (QRVO) has bonds due December 2025 that yield 4.5% and bonds due July 2026 that yield 5.24%.
Balance Sheet: Qorvo ended its June quarter with $392 million in cash and $558 million in debt. Since then, the company has raised $500 million worth of debt due in 2026, and used some of the proceeds to repurchase debt due in 2025.
Why Qorvo's Debt Looks Safe: Like Broadcom, Qorvo is a highly profitable chipmaker. The company's core RF chip business has only a handful of major rivals, and should see moderate growth in the coming years thanks to rising smartphone RF complexity, 5G infrastructure buildouts and IoT device growth. FCF totaled $583 million in fiscal 2018, and is expected by analysts to increase to $693 million, on average, in fiscal 2019.
Bond Yields: On a YTW basis, Ericsson (ERIC) has bonds due May 2022 that yield 4.38%.
Balance Sheet: Ericsson ended its June quarter with $5.1 billion in cash and $3.8 billion in debt.
Why Ericsson's Debt Looks Safe: While Ericsson has had its ups and downs in recent years, the mobile infrastructure giant is still making money, as cost cuts have served to prop up its earnings. Moreover, the company's bottom line will soon be getting a boost from the arrival of large-scale 5G buildouts. The consensus is for Ericsson to produce $566 million in FCF in 2018, $1.21 billion in 2019 and $1.55 billion in 2020.
Bond Yields: On a YTW basis, Expedia (EXPE) has bonds due August 2024 that yield 4.51% and bonds due February 2026 that yield 4.88%.
Balance Sheet: Expedia ended its June quarter with $4.9 billion in cash and $4.2 billion in debt.
Why Expedia's Debt Looks Safe: Expedia remains the biggest player in the U.S. online travel market, and (though smaller than Booking Holdings (BKNG) ) also has a sizable international footprint. The company produced $1.1 billion in FCF in 2017, and is expected to produce slightly larger amounts in 2018 and 2019. Between the online travel market's continued growth and the moats collectively possessed by Expedia and Booking, there's every reason to think the company will remain a major cash-producer in the coming years.