Corporate America Should Consider a Debt Reduction Diet

As the rest of America considers diet and exercise to shed those recently acquired pounds from the holidays, corporate America should consider their own diet: a debt reduction diet.

As we have mentioned in previous blogs, debt overstates your current standard of living while reducing your future standard of living. This holds true regardless of whether you are an individual or a corporation.

In a December 27th Financial Times article, journalist Eric Platt pointed out that global debt issuance set a record last year in the amount of 6.6 trillion dollars. Corporate debt made up roughly half of total debt issuance.

Corporate America is currently at a record level of debt. In the chart below you will see that outstanding debt is currently over 8 trillion dollars. The Federal Reserve estimates that this is roughly 45 percent of our GDP.

US Debt Outstanding Domestic Nonfinancial Sectors - Business Corporate (Nonfarm) Sector Chart

US Debt Outstanding Domestic Nonfinancial Sectors – Business Corporate (Nonfarm) Sector data by YCharts

2017 has already started off with record debt issuance. How are the debt proceeds being used?

FedEx is using part of their bond issue for a pension plan contribution. Many companies are using debt issuance to buy back their own stock.

FactSet mentions that we are approaching the 2007 peak of buyback issuance. The article also points out that buybacks are closely correlated to S&P performance.

This is troubling, as debt levels eventually reach their limits and become unsustainable.

Personally, I believe debt-fueled buybacks are a terrible corporate practice that should be addressed.

When a corporation buys back some of its own stock, the remaining shares typically go up in value since there are less shares outstanding in the market place.

Since most corporate officers’ compensation packages are tied to stock price performance, there is an incentive to play this game. However, I would argue that this does not create long term value for the shareholder.

With this type of debt issuance, it is time for corporate America to push back from the table.

Photo by victorcamilo

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