Thursday, January 12, 2023

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


  1. btw, have you noticed what is happening to the usd....

    have a look at its conversion to thai bhat... 1 year...

    1. Yep, USD is weakening across the board. It's now at multi-year low against the Mexican peso as well... But shouldn't higher US rates have the opposite effect on the dollar? Although rates in Mexico are that much higher to be honest also, around 10%.

    2. ...I guess markets really believe the FED is going to slow down rate increases considerably going forward, hence investors taking advantage of the rate spread vs emerging market debt.

    3. yeah, I think you are right... if the Fed can get 5% inflation consistently, they will be laughing all the way to the bank...

    4. I am not Hell.... but kind of gut feeling here.... I think the central banks have made a decision to hold gold instead of treasuries... hence the U.S. dollars precipitous decline...

  2. Markets have been on a tear to the upside also... Lots of optimism on the inflation front out there... no?

  3. If corporate cash flow is 4% of total debt, how do they service the debt? Shouldn't many companies be in trouble already given current interest rate?

  4. this is beautifully written...

  5. Markets are now convinced that the inflation scare is over, the Fed will stop raising rates and that they will start lowering them by June latest. This explains the dollar moves lately.

    IMHO however this view is premature. We may be over the first inflationary wave caused by soaring commodity prices, but we should now expect the second wave:
    1.steadily rising consumer prices driven by increased costs feeding through the production cycle
    2. Wage demands.

    I believe we won’t see 8-9% CPI again, but I fear 5-6% is here to stay for now. This is the Fed’s view, anyhow.