David Hay — Friday POW!: the Macy's (M) 6.7% bond due 2034
"A low-risk way to secure what is essentially a 7½% yield for many years to come" — and Haymaker believes its return can beat the S&P 500 over the rest of the decade.
One-line take: An unusual POW! — the pick is a bond, not a stock: the Macy's (M) 6.7% senior note due 7/15/2034 (BB+, trading at 95.474 for a ~7.45% YTM, ~290bp over comparable USTs). BB-rated bonds are Haymaker's "favorite slice" of corporate credit — sub-1% historic default rate, but high-yield coupons (the "BB anomaly"). Supporting the credit: Berkshire Hathaway just bought ~1% of Macy's shares (~$55M vote of confidence), M's free cash flow has grown double-digits two years running (+11% forecast 2026, ~$1.4B FCF this year, ~$1.3B cash, net debt ~$3.8B), CoStar values its real estate at $7.9–10.5B (above its $6.5B market cap, covering its $5.1B debt), and a Change-of-Control provision protects holders against an LBO. No portfolio table this week — updated Buy/Trim/Hold ratings come in next week's POW!, so portfolio.json is unchanged.
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| M | Macy's | QT · SA · STK · FA | Positive | Pick of the Week — the M 6.7% senior note due 7/15/2034, BB+, at 95.474 for a ~7.45% YTM (~290bp over USTs): "a low-risk way to secure what is essentially a 7½% yield for many years." Credit is asset-covered and improving — CoStar puts M's real estate at $7.9–10.5B (> its $6.5B market cap, covers its $5.1B debt), FCF up double-digits two straight years (+11% forecast 2026, ~$1.4B this year), ~$1.3B cash / ~$3.8B net debt; Berkshire just bought ~1% of the shares (~$55M) as a vote of confidence; a Change-of-Control provision protects holders in an LBO. Haymaker believes the bond's return can beat the S&P 500 total return over the rest of the decade. | read |
| BRK.B | Berkshire Hathaway | QT · SA · STK · FA | Neutral | Passing mention — Berkshire Hathaway (now run by Greg Abel) recently bought about 1% of Macy's shares; $55M is "walking around money" for Buffett's flagship, but a "nice vote of confidence" consistent with M's operating turnaround. A data point for the M credit, not a Berkshire call. | read |
No portfolio tables this week: the post closes by noting updated Buy, Trim & Hold ratings will come in next week's POW! edition, so david-hay/portfolio.json is left unchanged. Ruth's Chris (a "juicy steak" metaphor) and the S&P 500 (the return benchmark the bond is measured against) are references only — not tickers.
2. Talking points
This bond is no turkey — an unusual POW! pick
- The pick is a debt instrument, not a stock: a senior note from "the iconic American retailer that has popularized its Thanksgiving Day Parade" — framed as "as juicy as a New York steak from Ruth's Chris."
The key numbers — 6.7% coupon, 7.45% YTM
- Face interest rate 6.7%. The yield-to-maturity — a function of the 6.7% coupon, the current price of 95.474, and the 7/15/2034 maturity — works out to 7.45%, "a juicy, even delectable, yield."
- The spread shown above the price (290.78) means the bond is projected to return almost 3% (300bp) over the UST due 2036 — even though the Macy's bond is two years shorter.
The rating — BB+, and the "BB anomaly"
- The Bloomberg screen omits the credit rating; it is BB+, "half a notch below investment-grade."
- Numerous prior Haymaker editions call BB-rated bonds "our favorite slice of the corporate bond market": historic default rate negligible (<1%), and academic studies show BB-rated debt generates the corporate bond market's best risk-adjusted returns — the "BB anomaly" / "fallen angel effect," sitting at the IG/HY intersection.
The Berkshire vote of confidence
- Berkshire Hathaway (now run by Greg Abel) recently bought about 1% of Macy's shares. $55M is "walking around money" for Buffett's flagship, but "a nice vote of confidence" consistent with M's operating turnaround.
Cash flow — double-digit growth, two years running
- Critically for bondholders, free (excess) cash flow has increased by double digits in each of the last two years and is forecast to jump another 11% in 2026.
Asset coverage — the real-estate cushion
- The Wall Street Journal reported June 5th that, per property expert CoStar, M's real estate is worth between $7.9B and $10.5B — exceeding its $6.5B stock-market cap and comfortably covering its $5.1B of debt.
The balance sheet — cash, net debt, FCF
- M holds almost $1.3B in cash, so net debt is just over $3.8B; free cash flow is projected at $1.4B this year, giving it ample ability to pay down debt. (FCF is projected to drop materially next year before rebounding in 2028.)
The chart confirms the turnaround
- M's stock broke above shorter-term resistance late last year and "now appears poised to exceed four-year resistance."
LBO protection — the Change-of-Control provision
- The bond carries a Change-of-Control (CoC) provision: LBOs are anathema to bondholders (ratings downgrades, steep price drops), but here holders can sell the bond back to the company at a slight premium to par in a buyout — a gain from the recent $95.474 price.
Bottom line — a 7½% yield that can beat the S&P
- "A low-risk way to secure what is essentially a 7½% yield for many years to come." Doing the "usual neck-sticking-out routine," Haymaker says there's a good chance this return beats the S&P 500 total return over the rest of the decade — "and maybe even out to the 2034 maturity."
- The post ends noting updated Buy, Trim & Hold ratings will come in next week's POW! edition.
3. In plain English
M — Macy's (6.7% '34 bond) Positive
This week's pick isn't Macy's stock — it's a Macy's bond: a loan to the company that pays a fixed 6.7% a year and returns your principal on 15 July 2034. Because the bond currently trades a bit below face value (95.47 cents on the dollar), your actual locked-in return if you hold to maturity (the "yield-to-maturity") is about 7.45% a year — almost 3% more than a comparable US Treasury. That is a high-yield-sized payout, yet the bond is rated BB+, just one notch below "investment grade." Haymaker's long-running view is that BB-rated bonds are the sweet spot of the bond market: they almost never default (under 1% historically) but pay junk-bond-level interest — the so-called "BB anomaly."
The rest of the case is about why Macy's is unlikely to miss those payments. Its cash flow has grown double digits two years in a row (and is forecast up another 11% this year), it holds ~$1.3B in cash against ~$3.8B net debt, and — most reassuringly — the real estate under its stores is worth $7.9–10.5B, more than the whole company's stock-market value and far more than its $5.1B of debt, so bondholders are well covered if anything goes wrong. Warren Buffett's Berkshire Hathaway just bought about 1% of the shares, a small but encouraging vote of confidence. And a "change-of-control" clause means that if a private-equity buyer loads the company with debt (an LBO, normally bad news for bondholders), holders can sell the bond back to Macy's at a small profit. Bottom line: a fairly safe way to lock in roughly 7½% a year for years — and Haymaker thinks that beats what the S&P 500 will likely return over the rest of the decade. This is a long-term income hold, not a trade.
Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.