California is a risky bet
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The state of California soon is going to issue about $5 billion of tax-free municipal bonds. My broker tells me that the long-term bonds will offer a 5 percent current return and will be rated BAA. I would like to buy $20,000 of these bonds, but my broker believes that the bonds are risky. I would appreciate your opinion. Also, I’d like to ask you about Telstra, the large Australian phone company. Do you think it’s a good buy at this time? Australia seems to be doing well, and I think that there may be good long-term growth with this stock. So please advise me.
D.F., Springfield, Ill.
Dear D.F.:
I didn’t know that California had resurrected the “Cash for Clunkers Act.” But if you are a risk-averse investor, listen to your broker, because California’s balance sheet is sliding into the deep blue Pacific Ocean.
California’s “real” unemployment rate is in excess of 16 percent, and the state has the third-highest mortgage foreclosure rate in the nation. The state faces about $8.5 billion in additional red ink for the coming fiscal year, which could easily double the following fiscal year. California’s recovery will range from doubtful to shallow, and the legislature is reeling under pressure from the enormous payments on the state’s $70 billion-plus of outstanding debt. This year, the state’s cost of paying principal and interest on its debt represents 7.5 percent of annual revenues, and it is headed a lot higher.
Though a 5 percent tax-free interest rate is attractive (today) for a general obligation bond, I think future rates will be much higher, and I think the market value of the current California general obligation bond probably will fall between 12 percent and 20 percent in the coming 24 months.
Be mindful that California is more like a nation than a state, and its residents may be the most widely diverse group of people in the nation. California’s Alice in Wonderland legislature is having difficulty satisfying the state’s numerous minority groups (political, social, financial, racial and religious), who aggressively clamor for and compete with one another for social programs. No other state court system has to conduct business in 17 different languages or employ numerous full-time linguists. California’s financial problems are so bad that the state may be forced to seek help from the federal government. Your broker sounds like a smart guy. Follow his advice.
Credit Suisse has an outperform rating on Telstra Corp. (TLSYY — $16), which, according to Reuters, is on track to earn $1.33 a share this year with $22 billion in revenues and $1.54 per share in 2010 on about $23 billion in revenues. The $1.20 dividend yields 7.5 percent and could be increased to $1.31 in 2010. TLSYY has a strong balance sheet, over $1.3 billion in cash, has a 28 percent return on equity and a net profit margin of 16.1 percent.
TLSYY is likely to bow to a row with the Australian government, which wants the company to split its wholesale and retail operations. The split would mean that TLSYY would not be able to keep its 50 percent ownership in Foxtell (Australia’s pay TV operations) and may have to give up its fixed-line network. If management refuses to bow to political pressure from Canberra, TLSYY may not be able to participate in the country’s national broadband project and could be prevented from owning new mobile phone spectrum allotments. TLSYY provides data, communication, wireless and landline services to 21 million Aussies.
Anyhow, Credit Suisse feels that TLSYY could trade in the high teens within the next 12 months, which, including the dividend, could provide investors a 25 percent total return. I would be comfortable recommending its purchase as a high-class speculation.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2009 Creators.Com
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