A 100-year bet gone bad

Back in 1997, the markets were roaring. The Dow Jones industrial average was completing its third straight year of 20-percent-plus returns, essentially rewriting the record books. Tech IPOs were hitting their stride as Amazon.com went public that year. The economy was expanding at a 4.4% pace, and the cumulative effect of all of these things caused Fed Chairman Alan Greenspan to warn of “excessive optimism.”

Corporate debt markets did not escape the exuberance, as a new bond type became all the rage. 100-year corporate bonds were being issued from a variety of companies, presumably to match liabilities of insurance companies and others who demanded them.  Companies such as US West, Norfolk Southern railroad, Chrysler, Ford and IBM all issued 100-year debt in various terms. “Century” bonds were the new hit of Wall Street.

One such company, JCPenney Co Inc., joined this elite club by issuing their own 100-year bond. At the time in 1997, J.C. Penney maintained an “A” rating from Standard & Poor’s, which is a middle of the road investment-grade rating by issuer standards. Their stock was trading at record highs coming off the purchase of the Eckerd drug store chain. Suburban mall retail was at its crescendo, and J.C. Penney was coming off record holiday-season sales. 

The irony of Amazon IPO’ing in the same year that J.C. Penney was having its best year is obviously a relevant dichotomy here. It seems so apparent here in 2020 that their fortunes would be intertwined, yet opposite. Today, Amazon is worth more than $1.2 trillion, and J.C. Penney has recently filed for Chapter 11 bankruptcy amid the recent pandemic.

Back in 1997, however, J.C. Penney was able to issue 100-year bonds at a 7.625% coupon. That means that investors required J.C. Penney to pay them an annual interest of 7.625% for 100 years and pay them back their principal at the maturity date in 2097.

It seems ridiculous now (however, you would have received your invested money back in the form of interest by 2011 if you bought them when they were issued in 1997), but they sold $500 million of these bonds in 1997. Here in 2020, these bonds are selling at less than $0.05 on the dollar in the open market as J.C. Penney navigates bankruptcy restructuring.

In hindsight, it’s silly to assume that anyone would make a 100-year bet on any company, especially one in the volatile retail industry. Would investors make the same bet on Amazon today?  Meaning, if Amazon came out with a 100-year bond paying 7.625%, would investors buy it? My guess is that Amazon would not have a problem selling any amount of that bond, especially at that interest rate in today’s low-yield environment. In fact, Amazon has already sold 40-year bonds yielding about 4.5% in the open market, so this is not a stretch.

Many would say the fortress that is Amazon these days should have no problem fulfilling its obligation 100-years from now. However, how can we be so sure? Today’s economy looks spectacularly different from 1997. Who is to say we can imagine what it will look like in 2120?

So, what is the point, and how is it relevant to investors today? I think it’s easy to say we probably wouldn’t suggest buying a 100-year bond from any individual company. The risk in both term and credit is too much for one company, no matter who it is. However, if we are long-term equity investors like Warren Buffett (who says “our favorite holding period is forever”), should we look at owning any company for 100-years? Probably not, but we COULD own an index fund for 100-years.

The S&P 500, for example, is always evolving. Companies come and go, but what it does allow us to do is own a collection of the economy for an indefinite time period. There are companies in the index that won’t make it 100-years. Some of them may not even make it to 2021. Failure for one business, however, often presents opportunities for the survivors, and as the surviving businesses grow, as will the index. Also, I should assume that if national economies expand, companies in that index should reap the profits, thus enhancing my value as a shareholder. 

We don’t have to make the bet that J.C. Penney or even Amazon will be around in 30 or 100 years. We have the luxury of obtaining cost-effective diversification across companies, industries, and geographies, giving us that ‘forever’ holding period if we want it.

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