The level of corporate debt worries fixed-income investors, but this is a stock market column, and all this debt is good for the stock market because it funds acquisitions, dividends and share buybacks. Coupled with the lavish Federal Reserve and the economic recovery, corporate debt has helped stocks maintain a bull market for a decade in a row.
Now, companies are increasingly feeling the pressure to deleverage. Interest rates have risen from zero to 2%. With investment-grade bonds down nearly 4 per cent so far this year, money has been pulling out of taxable bond funds and looking for other investment options that perform better. The stock market may have to continue to operate without an improvement in bond performance.
The coming deleveraging trend has been the theme of Bank of America Merrill Lynch investment strategist Michael Hartnett, who is happy to take a long-term view when comparing today's markets to previous events such as Tulip mania or the South Sea Company bubble, not to mention that interest rates are at an all-time low. Us corporate bond issuance rose from $1,000bn in 2009 to a forecast of $13.6 trillion this year, and outstanding corporate debt rose to nearly $75 trillion, he wrote. This is equivalent to more than 45 per cent of gross domestic product, higher than during the financial crisis of the last decade.
Following the rise in corporate debt levels, share buybacks in the US have risen from $275 billion in 2008 to an estimated $4.8 trillion this year, Hartnett said. Like the stock market, share buybacks have reached an all-time high. But as interest rates rise and profit growth slows, Hartnett expects massive deleveraging by American companies.
In any case, the popularity of share buybacks may be fading. Apple Inc (Apple, APPL) spent $73 billion on share buybacks in the fiscal year ended September 2018, up from $33 billion in the previous fiscal year. Reducing the number of outstanding shares helped boost Apple Inc's earnings per share in his earnings report. But the share price of the king of share buybacks has fallen 20.2% since the end of September, 11 percentage points higher than the decline of the s & p 500 over the same period. Cisco Systems Systems (Cisco Systems Inc., CSCO, Cisco Systems) and Southwest Airlines (Southwest Airlines Co., LUV) also boosted earnings per share through share buybacks. Invesco BuyBack Achievers (PKW), an exchange-traded fund, underperformed the market, and the companies that made up the fund significantly reduced the number of shares outstanding.
Bankers worry that corporate leverage could trigger the next recession. Jerome Powell, chairman of the Federal Reserve, has said the debt levels of non-financial companies are cause for concern. But BofA Merrill Lynch analysts reported that corporate borrowing had slowed in recent quarters. Debt levels have fallen to about 3.4times earnings before interest, tax, depreciation and amortisation (EBITDA), down from a recent peak of 3.5x and a low of 2.5x set in 2012. Maybe we will avoid the debt cliff.
If companies deleverage, it will help them survive the recession. But it does weaken the momentum that drives the stock market up.
By Bill Alpert; Write to Bill Alpert at william.alpert@barrons.com
Copyright (c) 2018 Dow Jones Company. The copyright of this article belongs to Dow Jones and may not be translated or reproduced without permission.
Now, companies are increasingly feeling the pressure to deleverage. Interest rates have risen from zero to 2%. With investment-grade bonds down nearly 4 per cent so far this year, money has been pulling out of taxable bond funds and looking for other investment options that perform better. The stock market may have to continue to operate without an improvement in bond performance.
The coming deleveraging trend has been the theme of Bank of America Merrill Lynch investment strategist Michael Hartnett, who is happy to take a long-term view when comparing today's markets to previous events such as Tulip mania or the South Sea Company bubble, not to mention that interest rates are at an all-time low. Us corporate bond issuance rose from $1,000bn in 2009 to a forecast of $13.6 trillion this year, and outstanding corporate debt rose to nearly $75 trillion, he wrote. This is equivalent to more than 45 per cent of gross domestic product, higher than during the financial crisis of the last decade.
Following the rise in corporate debt levels, share buybacks in the US have risen from $275 billion in 2008 to an estimated $4.8 trillion this year, Hartnett said. Like the stock market, share buybacks have reached an all-time high. But as interest rates rise and profit growth slows, Hartnett expects massive deleveraging by American companies.
In any case, the popularity of share buybacks may be fading. Apple Inc (Apple, APPL) spent $73 billion on share buybacks in the fiscal year ended September 2018, up from $33 billion in the previous fiscal year. Reducing the number of outstanding shares helped boost Apple Inc's earnings per share in his earnings report. But the share price of the king of share buybacks has fallen 20.2% since the end of September, 11 percentage points higher than the decline of the s & p 500 over the same period. Cisco Systems Systems (Cisco Systems Inc., CSCO, Cisco Systems) and Southwest Airlines (Southwest Airlines Co., LUV) also boosted earnings per share through share buybacks. Invesco BuyBack Achievers (PKW), an exchange-traded fund, underperformed the market, and the companies that made up the fund significantly reduced the number of shares outstanding.
Bankers worry that corporate leverage could trigger the next recession. Jerome Powell, chairman of the Federal Reserve, has said the debt levels of non-financial companies are cause for concern. But BofA Merrill Lynch analysts reported that corporate borrowing had slowed in recent quarters. Debt levels have fallen to about 3.4times earnings before interest, tax, depreciation and amortisation (EBITDA), down from a recent peak of 3.5x and a low of 2.5x set in 2012. Maybe we will avoid the debt cliff.
If companies deleverage, it will help them survive the recession. But it does weaken the momentum that drives the stock market up.
By Bill Alpert; Write to Bill Alpert at william.alpert@barrons.com
Copyright (c) 2018 Dow Jones Company. The copyright of this article belongs to Dow Jones and may not be translated or reproduced without permission.