I am forever cautious about my debts. Yes, I understand the concept of leverage and how it can bring dramatic profits. Hell, I've benefited twice from taking on large debt when buying my first two properties. But still- I sleep better at night knowing that I don't owe anyone anything.
Last month, in preparation for our move to Portland, we bought a car. It is a grey 2017 Subaru Outback Limited Edition; we paid $31,881. (We bought this particular car in order to fit into our new home city. You see, in Portland, you cannot through a vegan burger down the street without hitting 3 Outbacks.)
I was set to pay cash for the all-wheel drive family vehicle, when the salesman uttered the magic words, "Zero down and 0% financing for the full 48-month term." For some reason, JP Morgan Chase Financing was offering this incredible loan.
Well, if you are going to give me free money on the hottest selling car in America, I'm sure as heck gunna take it! Thanks Subaru and $JPM !!
Debt isn't as cheap for America's largest companies, but it's pretty close, so it got me thinking: Are these companies also buying Outbacks and other such assets with this nearly free money?
To answer this, I took a look at the U.S. top 10 companies by market cap as of December 31, 2016. In particular, I studied what each company did with respect to Net Income, Issuance Of Debt, Retirement Of Stock (i.e. buying back their own shares), and Dividends Paid. In short, I was studying their respective financial strategies.
Here's my requisite bar chart:
For the past 4 years, Apple ($AAPL), Microsoft ($MSFT), Exxon Mobile($XOM), and Johnson & Johnson ($JNJ) have essentially been doing the same thing: taking on huge amounts of debt to fund their stock buy-back programs and hoard cash. These four companies could have simply used their net income (gold bar) to buy the same amount of their stock (dark blue bar) and pay the same dividends (light blue bar), without taking on any debt, but that would be no fun at all.
I wonder if the CFO's all meet in a small room every year, pull out ruler, and then measure the size of their leverage for bragging rights? Maestri (Apple's CFO) to Porat (Alphabet's CFO). "My Debt-to-Equity is .66 and yours is a measly .03-hahahah! Oh wait, you're a woman."
Anyway, as much as I hate to admit it, it is totally rational for these behemoths to issue bonds if they can do so for historically cheap rates. So, how cheap are their debts? Well, Apple's $86B has an average coupon rate of just 2.51%. It's not quite as cheap as my car loan, but then again, Apple is borrowing 2.7 million times more money than I am.
Not all companies are taking advantage of cheap debt though. Google ($GOOGL), Facebook ($FB), and GE ($GE) have recently been reducing their debts instead of accumulating more. GE is the champion in that respect, having paid off a staggering $175B over the last 4 years, cutting its debt by 2/3rds.
JP Morgan Chase owes $295B, which is equivalent to 12 times its 2016 Net Income. I am no financial wizard, but I don't think my 0% loan is going to help $JPM 's debt burden much.
One other curiosity I had was about Amazon.com. I distinctly remember sitting in B-School class in 1999, when I read that $AMZN had just issued a $1 billion bond. I thought to myself, "How the heck are these guys going to pay that off?" At the time, Amazon had racked up minus $159M in cumulative net income and was on the way to lose another $720M that year. It is kind of hard to pay your debts if you never make any profit.
It turned out that Amazon raised another $700M or so in debt financing the next year and gradually started converting the debt to equity. By the nadir of the 2008-9 financial crisis, Amazon had just $109M in outstanding bonds. Since that time; however, debt has become super cheap, and so Amazon's debt load has swelled to $8B at an average coupon rate of just 3.44%.
As it stands today, Amazon is in a peculiar position. Its long term debt is 60% greater than the sum of its net income since its founding over 20 years ago! As we all know, $AMZN only makes money through AWS and its digital (non-retail) services, so if the bond market cracks, we might see everyone's favorite retailer forced out of the business of selling physical things…at least those things that don't have the Amazon branding on the outside.
At any rate, the other nine companies on the list make a lot of money, so they should be able to find their way through any future debt crisis.
I just wish I could say the same for nearly every other company across the globe…
Disclosure: I am/we are long AAPL, MSFT.