Over the decades, companies have sought to find the right amount
of debt to carry on their
. Just enough debt is a good thing -- it can boost
per share (since fewershares need to be issued), and debt interest
expenses can help reduce a tax bite. But too much debt can be very
scary if theeconomy turns south.
Why is a badeconomy so dangerous for companies with excessive
debt-loads? Just like individuals paying off personal loans,
corporations with high amounts of debt are required to make fixed
loan payments. If Bob has student loans to pay off, he has to make
his payment every month, even if he loses his job. If the
slumps, companies still have to make their loan payments, even
though they're bringing in less money.
targeted roughly the same mix between debt and equity for many
decades, but when the economic crisis of 2008 hit, the company's
suddenly became too much to manage, and the venerable auto maker
needed to declare bankruptcy.
In response to the economic crisis of 2008, many companies sought
to trim their debt loads for fear of another
. But as that crisis has receded from view, companies have become
complacent again, piling up debt as if 2008 never happened.
The largest debt-holders are generally in financial services. It
may seem scary that firms like
Bank of America (NYSE:
JP Morgan (NYSE:
each carry more than $300 billion in
, but these banks are actually far healthier than they were a few
years ago. New regulations have forced them to hold a lot more cash
than they did before, and the odds of another meltdown for them is
much less likely than it was in 2008.
But what about non-financial firms? Since there are no
regulators to monitor their balance sheets, might they being
running too much risk for these uncertain economic times? Maybe,
maybe not. But investors may want to steer clear of these firms -
at least until we're sure that the U.S. economy has not slipped
back into recession.
A handful of non-financial companies carry more than $20 billion in
Here are five companies with the largest debt loads in the S&P
500. If the economy slumps in coming quarters and years, their high
debt loads could prove toxic.
1. GE (NYSE:
A high level of debt proved to be disastrous for GE back in 2008,
as the company's GE Capital division suddenly found itself without
a lifeline when the Lehman Bros. collapse caused chaos in financial
markets. GE relies on overnight banking transactions to roll over
some of its debt.
Back then, GE saw its
fall from $25 in the summer of 2008 to just $6 in early 2009. Might
lightning strike twice? Perhaps not to such extreme levels, but
it's little comfort to investors that GE still carries roughly $3
in debt on its books for every dollar of equity. A deep economic
retrenchment would bring this balance sheet right back into the
2. Ford (NYSE:
This auto maker managed to avoid bankruptcy in 2008 by having a bit
of foresight. It sold many assets in the prior 24 months, helping
to raise cash to offset any looming debt crunch.
Although Ford's current $100 billion debt load seems scary, the
auto maker has actually been building cash levels while paying off
debts that were expected to come due in the very near-term. As a
result, Ford could handle a hefty economic slowdown without raising
bankruptcy fears. But it best not be too long a slowdown. If such a
slowdown lasted for several years, Ford would need to slash
spending to hoard cash, putting it at a disadvantage to better
The biggest risk for this firm is not only a deep economic
pullback, but also other unforeseen events that would require the
company to spend a lot of money on paying people's insurance
claims, such as environmental calamities. With $85 billion in debt
on its books, this insurer would be ill-equipped to run out and
raise fresh capital through the stock market.
4. American Express (NYSE:
AmEx suffered a GE-like bruising in 2008, seeing its shares plunge
80% from the summer of 2008 to the spring of 2009. Fears that a
protracted economic crisis would cause the company to collapse
under its debt load dominated the business headlines, though the
concerns proved unfounded. AmEx still managed to generate $4.6
free cash flow
in 2009, 20% below 2008 levels. Free cash flow rebounded to $7.5
billion last year. It would take a really bad economic shakeout for
AmEx's debt-laden balance sheet to become an issue again.
5. AT&T (NYSE:
) and Verizon (NYSE:
These two should be lumped together as they have very similar
business models. Each has a declining landline business and a
burgeoning wireless business. It would take an even faster decline
in the landline business, or an all-out
in the wireless business, for investors to fixate on the balance
More than likely, both of those businesses will continue on their
current trajectories -- regardless of the health of the economy --
giving their respective management teams ample time to adjust their
balance sheets to any new realities.
Action to Take -->
What about your portfolio? You may want to check out all of your
investments to see how much debt they carry. If you're looking for
candidates to sell, then the stocks with the most debt should be at
the top of your list -- at least until it becomes clear that the
economy isn't heading back into recession.
Until then, look for companies that have a low debt load. Since low
debt payments have a smaller impact on profits, these companies are
safer in times of economic trouble, as well as less volatile.
-- David Sterman
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