EC Why Record Corporate Debt Might Not Be So Bad: 8 Debt Laden Blue Chips

Since the Great Recession corporate America has been bingeing on debt. According to S&P Global over the last year, corporate debt maturing through 2024 that is rated by S&P Global Ratings increased by 3%, to $10.6 trillion. As a result, according to an article in the website Common Dreams, corporate America’s credit rating has collapsed over the past two decades. They point out that only two companies, Johnson & Johnson and Microsoft, are AAA-rated compared to 60 companies that held that coveted rating in the early 1990s. Moreover, they also point out that half of all investment-grade corporate debt is rated BBB or lower, and 1/3 of those companies are rated BBB-, which is only one notch away from junk status.

Moreover, many of our most iconic and recognized major corporations are showing negative equity and/or book value. This includes stalwarts such as McDonald’s (MCD), Home Depot (HD), and Starbucks (SBUX). Yet despite all three currently reporting negative equity, they have all dramatically outperformed the S&P 500. This begs the question that if debt is so bad, then why are these companies’ stock performance doing so well?

To find the answer, I felt the logical place to start was by asking the questions: how much debt have they all taken on, and how much has it destroyed shareholder equity (book value)?In other words, what was their motivation -and is it helping or hurting shareholders. The following screenshots look at the growth of the debt for each of these three iconic dividend growth stock stalwarts:

Balance Sheet Perspectives: McDonald’s, Home Depot and Starbucks

Strong balance sheets represent the foundation of a company’s quality and its value. However, balance sheets have become significantly more difficult to evaluate in our modern economy. Stated colloquially, the balance sheets of today’s companies are not our grandfather’s balance sheets. Changes in accounting rules and the nature of service businesses with intangible assets versus industrial businesses with tangible assets create challenging comparisons. In short, price-to-book value no longer serves as a sacred valuation metric. In fact, many of our most revered companies today report negative equity and yet continue to outperform for years and years.

Although I will be discussing eight debt-laden blue chips with this article, for brevity’s sake I offer the following summary balance sheet, cash flow statement, and income statement analysis of three iconic brands: McDonald’s, Home Depot and Starbucks. What might be shocking for many to learn is that each of these blue-chip dividend growth stalwarts currently report negative equity (book value).

McDonald’s: Long-Term Debt and Total Debt Since 2008

The following FUN Graph (fundamental underlying numbers) looks at total debt and long-term debt on both a per-share and a total in millions basis. Later, I will show common shares outstanding (share buybacks) over the same timeframe. I believe it is important to evaluate debt from both these perspectives.

McDonald’s: Debt per Share

McDonald’s long-term debt per share and total debt per share have increased by 19.2% and 19.3% respectively. However, it is also important to note that most of their debt is long-term in nature.

(Click on image to enlarge)

McDonald’s: Long-Term Debt and Total Debt Plus Common Equity in Millions

McDonald’s gross long-term debt and total debt has increased by a compound annual growth rate average (CAGR) of 16.1% and 16.2% respectively. Importantly, this led to the destruction of common equity (book value) by 2016. Negative shareholders equity has continued to balloon ever since. 

(Click on image to enlarge)

Home Depot: Long-Term Debt and Total Debt Since 2008

The following FUN Graph (fundamental underlying numbers) looks at total debt and long-term debt on both a per-share and a total in millions basis. Later, I will show common shares outstanding (share buybacks) over the same timeframe. I believe it is important to evaluate debt from both these perspectives.

Home Depot: Debt per Share

Home Depot’s long-term debt per share and total debt per share have increased by a compound annual growth rate average (CAGR) of 16.5% and 15.8% respectively. However, it is also important to note that most of their debt is long-term in nature.

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Disclosure:  No Positions.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the ...

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Alpha Stockman 2 days ago Member's comment

It's crazy how today's low interests rates have practically made debt into free money!

Soul123 2 days ago Member's comment

For a long time, we have been in a low interest rate world. With the current COVID19 situation and FED relief funds, I don't think it will go away anytime soon.

With the Fed stepping in during such financial crisis as well as the way we will be living in here onwards, do you think comparing the various financial attributes prior to GFC with current ratios? Are they not misleading with such underlying effects that most of the retail investors are not realizing/considering?

Rachel Anne 2 days ago Member's comment

Great read. Highly recommended.