People are still going nuts for bonds. They are paying up for the bonds of companies in a fashion that's just extraordinary. This morning on CNBC, David Faber pointed out that Viacom (VIA), yeah, the TV network, was able to raise $250 million in 30-year bonds at an astoundingly cheap 4.5% -- and unsecured, no less.
People, that's insane.There's no way that anyone should reach for a 30-year piece of paper from a decent-but-levered company, paying only 150 basis points more than U.S. governments over a period where you have to believe that inflation could come roaring back or the methods of television distribution could change radically, and radically against Viacom.
Frankly, if people really need yield, why not go with the common stocks of companies that could boost their dividends colossally over the next 30 years, giving you a potentially fantastic return?
And you don't have far to look for them. Consider that you can get slightly more than 5% from owning the common stock of master limited partner Kinder Morgan Energy Partners (KMP). Here's a distribution that has been increased year after year after year, yet its yield is above Viacom's.
Or how about the dividend aristocrats like 3M (MMM) or Procter & Gamble (PG) or Emerson (EMR)? Companies so committed to shareholders that they raise their dividends year after year after year, and have track records demonstrably better than Viacom's.
This rush for yield in the fixed income market almost, per se, has to end badly given the rates they are pricing these corporate bonds off of are artificially low courtesy of the Federal Reserve, in an endless attempt to get the economy, particularly the hobbled housing market, back on track. While many believe the Fed only can control the shorter-term maturities, the impact on the longer-term, the kind of rates that Viacom is taking advantage of, is undeniable.
Anyone who buys this 30-year Viacom bond has no understanding of the history of interest rates or how they can skyrocket after just a few years of budget deficits that aren't aided by the fed.
More important, they have no recognition of the fundamental ability of companies to be able to reinvent themselves over a 30-year time period and do the right thing by shareholders by returning capital to them in the form of bountiful dividends.
My hat is off to Viacom for getting this terrific bargain. I want to throw an Oddjob-like hat, though, at the buyers of the paper. They deserve beheading, that is if they even have one -- something that has to be called into question given the high risk and paltry return of this 30-year piece of what, ultimately, might be junk.
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