A successful company will generate retained earnings. The company can either pay a portion of those retained earnings out in dividends or hold onto the money as a source of competitive advantage. As the pool of retained earnings starts to grow, management will want to put the asset to work. While stocks provide a higher rate of return, they have downsides. Bonds provide steady income, whereas stock do not. Investors and the Board of Directors can view investment in stocks as speculative. Many view an investment in bonds as conservative and prudent.
Bonds provide monthly or quarterly income. The interest rate is obligated by contract, so the income stream likely will be consistent and steady. Corporations plan projects and growth via budgets. To provide better visibility into these budgets, companies will invest in bonds. Also, bonds provide a better source of asset stability than do stocks. According to InvestingInBonds.com, the corporate bond market has approximately $4 trillion debt outstanding. This provides a liquid market to buy or sell corporate bonds.
Companies want to put their excess cash and retained earnings to work. Bonds provide a higher interest rate than cash or cash equivalents. Many companies struggle to provide investors with consistent revenues and income. By investing their cash in bonds, the bonds can help a business provide this consistent income.
If a company isn't in the business of managing money, a conservative investment theme will please the Board of Directors. As management typically has outside investors, conservatism and prudence go a long way toward creating a long-term relationship with those investors.
Bonds have durations ranging from several months to 10, 20, 30 years and longer. Companies usually plan for cash uses, such as acquisitions or repurchasing common stock. Most businesses implement extensive plans. They have plans for budgets, acquisitions and growth. Bonds provide a stable source of income that can increase income visibility. The increased visibility lends its toward better accuracy in forecasts.
The economic environment has a tendency to change and become unpredictable. Companies must adapt to the surrounding economic environment. Bonds provide a liquid market for companies to adjust and make changes. If a business needs to liquidate an investment to make a strategic acquisition, bonds provide a medium with such flexibility.
Bonds provide companies with a consistent source of income. This income allows more visibility in planning and achieving corporate goals. The increase in visibility reduces stress for corporate executives as they strive to achieve their corporate goals. As corporate goals change in volatile environments, bonds offer flexibility to change with these goals.
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