Monday, September 20, 2010

Corporate Debt

Bob Doll from BlackRock was on CNBC this morning and he said corporations are sitting on a lot of cash. He was suggesting that they should pay out more dividends or buy back more stock.

Click to Enlarge.

The red trend line is a long-term exponential growth curve. That's a 4.07% growth rate above and beyond inflation.

August 3, 2010
MarketWatch: The Biggest Lie About U.S. Companies

Commentary: Healthy balance sheets? They owe $7.2 trillion, the most ever

What's $7.2 trillion among friends?

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

I heard it today. It prompted me to make a chart. Go figure.

Source Data:
FRB: Flow of Funds Accounts
St. Louis Fed: CPI-U


mab said...


Bob Doll is an uber-shill. The fact that he is president of the largest asset manager in the world (Blackrock) says it all.

Wall Streeters are like used car salesman. The only difference is that the public knows what to expect from the used car industry.

From your link:

But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?

As ever, the truth is someone else's problem and no one's responsibility.

When it comes to the economy, let's just hope the public is too hopped up on painkillers and antidepressants to notice. If they knew what was really going on, there'd be trouble.

I've got news for the journalist of your link - there IS trouble.

Stagflationary Mark said...


Dec 11, 2007
BlackRock's Doll says U.S. stocks set to catch up

Barring a recession, Doll said he does not see the S&P 500 index .SPX dropping below 1,400 and said that, once the credit market normalizes, the benchmark could break out of 1,450 and 1,550 range on the upside.

Hindsight shows we were in a recession when he said that of course.

As a side note, I posted a link to this post in the Calculated Risk comments. I did it from my computer and could not hang around to chat due to a sleeping pet bird. I can post comments here though. I'm using the Playstation 3 in the family room. Our whole economy is being "gamed" so I figure that's okay, lol. Sigh.

Stagflationary Mark said...

Here's another thought.

$7.2 trillion is roghly $23,500 for every man, woman, and child in America.

Just think if corporate America (not including banks) didn't owe that?

If they could borrow it all today then they could make one heck of a one-time dividend to the shareholders or simply offer every American citizen a brand new car! Woohoo!

If "ifs" and "buts" were candy and nuts then we'd all have a Merry Christmas. Too bad. Our Candy Mountain is not so brightly lit though. Hide the kidneys!

EconomicDisconnect said...

With insider selling beating insider buying by a factor of 100,000:1 why do companies borrow money to buy back shares from their own people? Oh wait, that sounds smart!

Stagflationary Mark said...


Buying back stock to raise shareholder value doesn't seem to make much sense to me. I should already be factoring in that cash as part of the worth of the company. The company's value should drop $1 for every dollar they give me. They'll no longer have it.

It pretty much proves that the company can't think of anything else to do with the money. It can't use the money to grow. It can't use it to hire more employees. It can't use it to build new plants.

The same goes for using the cash to increase dividends. What am I supposed to do with the dividends? Buy more of the stock? If I did, it would be exactly the same as a stock buyback. Once again, the extra dividends do not help grow the company. It can't use that money to hire more employees. It can't use it to build new plants.

Stock buybacks and extra dividends is just another way of saying, "We're stumped. We can't think of any way to use the money productively."

If most companies do that I'd argue that unemployment will remain high and growth will remain weak.

I'm not sure I blame them though. I can't think of anything to do with the money either. That's a good reason to be bearish though, not bullish.

Anonymous said...

Note this is the aggregate. There may indeed be firms without debts that are profitable and could increase dividends. In fact, I own shares in one like that.


Also, if they are sucking up cheap debt to be deployed usefully, well, that may not be so bad. Not sure what they are doing with it'd think that would show up somewhere.

WV: cultiona

Stagflationary Mark said...


Subprime borrowers sucked up cheap debt to be deployed. Our economy had a heck of a time "containing" all that deployment too. Just sayin'!

I bring it up and I'm not alone. Calculated Risk says...

FT: Junk bond prices hit pre-crisis levels

This seems like investors chasing yield - and that is making it easy to sell junk bonds. Oh well ...

EconomicDisconnect said...

I was kidiing, taking on debt to buy back shares is a classic get out top move.

Anonymous said...

Investors seeking yield...Jesus this record is broken.


Stagflationary Mark said...


I know you were kidding. Didn't mean to imply otherwise.

It just triggered some kind of "buy back" rant in me. That's all.

I'm not the first either. Everyone is in rant mode on this, lol.

The Market Ticker: More Idiocy In The Media: Buybacks and Debt


Very well put, lol.

David Foster said...

Mark--"The same goes for using the cash to increase dividends. What am I supposed to do with the dividends? Buy more of the stock?"

You can buy stock in a different company, which might be able to use the money more effectively. Part of our problem is corporate management holding onto cash that they have no *real* use for, and developing fantasies--typically involving acquistions and/or moves into markets about which they know nothing--about how they're going to use it effectively. I think a lot of economic value gets destroyed this way.

Stagflationary Mark said...


I complete agree with you.

That said, if the best use of the cash is to buy stock in a different company, then perhaps selling the company's stock to generate even more cash to buy the stock of other companies might be a good idea too. It might therefore imply that the company's stock price is overvalued.

In the early days, the investment that retired me started paying dividends.

I paid about $4 per share for the stock. Its first dividends were 50 cents per quarter if memory serves. Cash was coming in so fast that they just didn't know what to do with it. That changed when the "suits" came in. Dividends were halted.

As a side note, the company joked in the early days that they would buy TSR for cash someday. To my amazement, they actually did.

After the emergence of collectible card games, TSR released several new collectable game lines: Dragon Dice and Spellfire. Neither found great success in the market place. Their inventory control became virtually nonexistent, and their warehouse became packed full of unsellable product.

I was shown a market share chart in one of the meetings. It was like the success of Wizards of the Coast was coming directly at TSR's expense. Literally. TSR could not adapt to the "collectible card game" wave fast enough and their attempt flopped.