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Walgreen Co.

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Source: The Wall Street Journal | CFO Journal, March 27, 2015 article

THE WALL STREET JOURNAL.

CFO Journal.


March 27, 2015, 7:00 AM ET
Moody’s: Shareholder Dividend Payments Hurting Bond Market


By Vipal Monga

Senior Editor

 

 

Bloomberg News

Companies that skimp on spending on factories and equipment could hurt bond market credit quality, argues Moody’s Investors Service.

Credit quality in the investment-grade bond market will weaken in coming years as more companies funnel dividends to shareholders and skimp on investments in factories and equipment, according to a new report by Moody’s Investors Service.

“Investment-grade U.S. companies are increasingly returning cash to shareholders, and have less free cash flow to repay debt today than they did before the recession,” said the report.

Moody’s noted that low interest rates are making it easy for companies to borrow, but also increasing the allure of dividends, because investors are looking for more return on their cash. That’s encouraged companies to increase the amount of their earnings before interest taxes depreciation and amortization (Ebitda) devoted to such payments.

The ratings firm said that the median percentage of Ebitda spent on dividends rose to 11.9% in the third quarter of last year, up from 9.4% in 2013, and the highest since at least 2005, as far back as its analysis went.

Meanwhile, the proportion of Ebitda that investment-grade companies allocated to fund capital spending fell to 27.5% in last year’s third-quarter, down from 29% for full-year 2013, and 31.2% for all of 2005.

That lack of investment in future growth could slow the broader economy, which could create a cycle where companies’ earnings weaken and credit-quality measures, such as debt-to-Ebitda worsen, said Moody’s.

Rising interest rates in coming years could make things even worse, said Bill Wolfe, a Moody’s analyst. He said companies that borrowed money to fund higher dividends would have to refinance their debt at higher rates in coming years, weakening their credit profiles as they paid more in interest.

“That’s the real latent risk that’s built in,” he said.

Companies in the S&P 500 paid a record of about $350 billion in dividends last year, up 12% from the prior year, according to S&P Dow Jones Indices.

Bond investors, however, continue to scoop up debt. As of last Tuesday, investment-grade and junk-rated companies sold a total of $438 billion in new bonds this year, the highest amount for a similar period on record, according to Dealogic.

Moody’s said that such investor demand is “inadvertently rewarding” companies spending more on shareholder returns.

 

 

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