Hi Everyone.  I thought it would be interesting to mix it up a bit and take a look at the corporate credit ratings for my Portfolio stocks.

This is something I’ve been meaning to do for a while, but never got around to it.  It provides me with another measuring stick for my Portfolio holdings.

So, what is a corporate credit rating and why does it matter?  I’ll attempt to address that first, then take a look at where my portfolio stocks fall in the ratings.

 

Definition

A corporate credit rating is an assessment from an independent agency regarding the likelihood that the corporation will fully meet its future financial obligations.  It’s basically an indication of the company’s relative ability to pay its creditors.

Credit ratings are forward looking, and they do not indicate investment merit.  Instead they refer to only a single aspect of an investment decision – credit quality.  Credit ratings are an important consideration in buying/selling a stock, but they are not the only criteria on which investors should base their decisions.

The rating does not suggest a guarantee that the corporation will pay out, or that it will not default.  Also, it should be noted that corporate credit ratings are an opinion of the rating agency, not fact.

The three largest credit rating agencies are: Standard and Poor’s (S&P), Moody’s, and Fitch.  Investment research firm Morningstar also provides corporate credit ratings.

 

Why Are Credit Ratings Useful?

For the corporation, credit ratings can play a role in enabling them to raise money in the capital markets.  Rather than obtaining a bank loan, the corporation can alternatively borrow money directly from investors by issuing bonds or notes.

For the lenders, the ratings provide a measure of the possibility that they will be repaid on time, and in full.

For us investors, these corporate credit ratings provide one more metric with which to judge the corporation we are investing in.

 

Rating Ranges

The ratings vary a bit between the major rating agencies, however, for the most part, they are quite similar.  Here’s a table comparing the various ratings among the major agencies.

 

 

In general, ratings are considered to be investment grade or speculative (junk)…

I’m going to focus on ratings from S&P.  Below it shows how S&P defines their major rating categories.  These major categories are usually modified by the addition of a ‘+’ or ‘-‘ to show further standing within that category.  You can see S&P provided a couple such examples with ‘BBB-‘ and ‘BB+’ as these straddle the line between investment grade and speculative grade.

 

 

Credit Ratings for My Portfolio Stocks

I obtained the S&P credit ratings for my stocks from FAST Graphs, then sorted them in the table below.

My Portfolio contains 48 holdings, and all but 4 have an S&P credit rating.  I believe Skyworks Solutions (SWKS) and T. Rowe Price Group (TROW) don’t have a rating due to the fact that the companies are debt free.  Removing the 4 companies with no credit rating, that left 44 companies to sort.

From the table, one can see that all but two of my holdings (so 42 of 44) have investment grade credit ratings.

Furthermore, over half of those stocks with investment grade ratings (25) are Upper Medium Grade or better.

In general, the overall credit quality of my Portfolio stocks looks pretty good.

I own both stocks that currently have a ‘AAA’ or ‘Prime’ credit rating.  Those companies are Johnson & Johnson (JNJ) and Microsoft (MSFT).  I’d like to see MSFT become a bigger part of my Portfolio, but I’m trying to add at better valuations.  We’ll see if I can do that.

One company of mine that I know is trying to improve their credit rating by paying down their debts is CVS Health (CVS).  CVS has been deleveraging their balance sheet ever since their merger with Aetna, and that’s part of the reason the company has chosen to forego dividend raises in the past 3 years.

You’ll see I have 7 stocks that are investment grade at ‘BBB-‘, yet are a single downgrade away from speculative status.  Most of these stocks aren’t huge holdings for me, but RPM International (RPM) is my 2nd biggest holding, and Broadcom (AVGO) sits at #18.  Thus, I’ll keep a mindful eye on these holdings.

As noted, I do have a pair of stocks with speculative credit ratings in Iron Mountain (IRM) and Nexstar Media Group (NXST).  IRM is my smallest Portfolio holding, so I don’t have much exposure there.  However, NXST is currently my 21st largest holding.  I don’t anticipate its ‘BB-‘ credit rating will affect how I treat my current investment unless I see the credit rating transition lower.

 

 

There you have it…. a quick look at the corporate credit ratings of my Portfolio stocks.  We’ve determined that the corporate credit rating can be another metric to help you evaluate a company prior to investment, or to help assess the quality of your existing holdings.

Are you surprised by any of the credit ratings (good or bad) for my holdings?  Have you taken a look at the credit ratings of your portfolio stocks before?  Please share in the comments!