2015, 7:00 AM ET
Moody’s: Shareholder Dividend Payments Hurting Bond
Companies that skimp on
spending on factories and equipment could hurt bond market credit
quality, argues Moody’s Investors Service.
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
“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.
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.
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.
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.
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.
real latent risk that’s built in,” he said.
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.
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.
that such investor demand is “inadvertently rewarding” companies spending
more on shareholder returns.