Corporate Debt Burden - Share Buybacks And Dividends

A period of almost 15 years of exceptionally low interest rates prompted corporations to borrow rather than issue new shares to finance themselves (in fact, many listed companies have been buying back stock in record amounts).  Debt of the non-financial corporate sector presently stands at $13 trillion, a record high (see chart below).

What is more important than total debt is the debt burden versus a company's cash flow. It now stands at a very, very hefty 25 times (see chart below).  

Another way to look at this is that corporate cash flow is a mere 4% of total debt (= 1/25);  compare this to current interest rates for 3 month commercial paper and things are becoming tight, indeed (see chart below).

What the chart shows is that typical financing costs are now exceeding corporate cash flow, forcing corporations to take appropriate measures - eg stop share buybacks, at the very least. Buybacks reached a lofty annualized rate of $1.1 trillion and have since eased off (see chart below - 3Q2022 latest data)

Buybacks are very sensitive to financing costs and the business cycle, of course, so I fully expect that they eased further during the last 4 months, and will continue to do so for as long as interest costs exceed cash flow.

Another issue is dividends, also highly correlated to cash flow. Companies absolutely hate to reduce dividends, so they are less volatile than buybacks.  They reached an all time high in 2022 (see chart below).  But with debt service costs now exceeding cash flow I cannot see how dividends will remain immune for much longer. 

In sum: as interest costs keep rising, or even if they stay at present levels for more than a few more months, companies will be forced to cut share buybacks sharply and even reduce dividends.  What this means for stock prices is pretty obvious.

Note: Charts from Yardeni Research