Woolworths Notes II
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As expected, the Woolworths notes recommended in Woolies Notes II in the basket from 26 Oct 11 (Subscribe - $100) listed at a premium to their $100 issue price. The relatively attractive terms and yield ensured a small premium, which in turn drove strong demand.
As we said at the end of that review, though, paying a price only slightly above the issue price reduces your return significantly. With interest rates having fallen, and the price of the notes having risen, the running yield on the notes is now 7.3%.
But it’s more correct to look at the yield to maturity assuming, as is likely, that the notes are redeemed in November 2016. The yield to maturity, which takes into account that noteholders will probably receive their $100 a note back in 2016, is approximately 6.4%. This is much lower than the 8.0% yield anticipated at the time of the original review.
So we’re downgrading. We’d love another chance to recommend the Woolies notes, but won’t do so unless the price falls to $100 or less. It’s time to HOLD.
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