Monday, February 06, 2017

Room For More Debt?

As was mentioned in a previous post, S&P 500 companies have taken advantage of cheap debt to fund continued capex and share buybacks since the recession.  This has driven total debt to new all-time highs.  Though there has been much concern about the "abuse" of low interest rates to create a rally fueled by buybacks, it does not strike me as much of an issue.  In fact, it makes sense for companies to take advantage of cheap debt to lower their WACC with the potential side effect that they shift their capital structure.  Interestingly, however, the capital structure has not shifted with this proliferation of cheap debt.

The total debt to book value of equity ratio appears to be at a reasonable level.  If anything, it looks like there may be room for additional debt for S&P 500 companies.  This is even more true when coupled with the very low interest expense burden.  It is not that debt has not grown since the last recession, it clearly has, but the book value of equity has grown much faster.

I am not necessarily campaigning for these companies to take on more debt, but rather observing that corporate debt (at least in the S&P 500) does not seem to be nearly as big a problem as is often reported.

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