The Wall Street Journal reports today that bankers are gauging investors’ interest in 100-year corporate bonds that pay about 75 basis points more than comparable 30-year bonds.
The proposal comes at a time in which, as Journal reporter Katy Burne writes in her news lede, “bond investors are buying almost anything the market throws at them.”
That means investors are lining up to buy 10-year U.S. Treasuries that yield 2.6 percent rather than cash-rich stalwart corporations whose common stocks yield better than a percentage point more in tax-advantaged dividends.
A couple of weeks ago, Johnson & Johnson set a new record in the bond market by issuing $1 billion in 10-year bonds yielding 2.95 percent. J&J’s common stock yields 3.7 percent. Value investor Whitney Tilson recently called that discrepancy “insane” in an e-mail to subscribers and pointed out that the odds were hugely in favor of the common stock outperforming the bond.
J&J isn’t the only company lining up to tap investors’ enthusiasm for the perceived safety of bonds. IBM and McDonald’s have also recently issued debt at historically low rates.
The perception among investors is that bonds are safer than stocks, and by some definition that may be true. Bondholders receive steady interest payments and have priority over stockholders in the case of a corporate bankruptcy. Bonds also protect in the event of deflation, which many investors now fear.
But that doesn’t mean bonds can’t decline in value. Bonds tank when interest rates rise and inflation increases. Rates are now as low as they can go, and any whiff of economic recovery is likely to drive them higher. That would negatively affect the price of longer-dated bonds more than short-term issuances, which is perhaps why Warren Buffett has reportedly been shortening the maturity of Berkshire Hathaway’s bond portfolio.
But as the Journal article points out, some fearful investors are interested in century bonds, which will mature after their death, just for a bit more yield than offered by the 30-year Treasury. These type of bonds have rarely been used in the past decade.
It’s obvious why 100-year bonds would be attractive to companies. What a great opportunity to lock in at today’s interest rates for the next 100 years.
But there are surely better opportunities for investors. Legg Mason’s Bill Miller recently said large-cap U.S. stocks are as cheap relative to bonds as they’ve been in his entire career. Jeremy Siegel and Jeremy Schwartz wrote in the WSJ last week that the bond market, particularly in U.S. Treasury bonds, has become a bubble akin to the technology-stock fad of the late 1990s.
Among the names that the WSJ mentions today that have a history of issuing 100-year bonds are Norfolk Southern, Anadarko Petroleum, Apache, Burlington Northern Santa Fe, Motorola, Walt Disney, Coca-Cola, Federal Express, Ford and IBM.
Buffett-watchers will notice that Berkshire has invested in the stocks of several of those names. It’s easy to see why. Investors need to have a lot of faith in a company’s ability to survive to buy bonds that don’t mature for a century. These types of companies must have strong moats, as Buffett calls them.
Therefore it makes a lot of sense to consider as an investment any company that has the ability to sell a 100-year bond.
But target the stock, not the bond.
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