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Traders Workshop

US Companies Are More Indebted, More Leveraged, Less Profitable, and Yet Better Valued Than Ever

Companies / US Debt Aug 08, 2017 - 03:58 PM GMT

By: John_Mauldin

Companies

Once again I start with a warning: A recession is eventually coming and a financial crisis with it. There is a real potential for it to come soon, although serious tax reform could delay it.

But sooner or later, the pressures of too much government debt and too many government promises, plus growth that is continually grinding slower, will break out into a recession.


There is always another recession.

You can’t run your life and business as if you expect one to happen tomorrow, but you can make contingency plans. With each passing day, recession gets closer, but that’s no reason to be fearful if you’re prepared.

Troublesome Facts

The industrious Michael Lebowitz of 720Global performed an invaluable service last week by assembling “22 Troublesome Facts” behind his reluctance to follow the bullish herd.

Most have helpful source links, too. Here’s a short recap:

• The S&P 500 cyclically adjusted price-to-earnings (CAPE) valuation has only been higher on one occasion, in the late 1990s. It is currently on par with levels preceding the Great Depression.

• Total domestic corporate profits (w/o IVA/CCAdj) have grown at an annualized rate of just .097% over the last five years. Prior to this period and since 2000, five-year annualized profit growth was 7.95%. (Note: Period included two recessions.)

• Over the last 10 years, S&P 500 corporations have returned more money to shareholders via share buybacks and dividends than they have earned.

• At $8.6 trillion, corporate debt levels are 30% higher today than at their prior peak in September 2008.

• At 45.3%, the ratio of corporate debt to GDP is at historical highs, having recently surpassed levels preceding the last two recessions.

In short, US corporations are simultaneously more indebted, less profitable, and more highly valued than they have been in a long time.

Plus, they are intentionally making themselves more leveraged by distributing cash as dividends and buying back shares instead of saving or investing that cash.

Yet investors cannot buy their shares fast enough. Maybe this will end well… but it’s hard to imagine how.

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