[A] prominent feature of extended bull markets is higher levels of leverage, as measured by the ratio of debt to equity. We found that the debt-to-equity ratio went up during every late-cycle bull market since 1980. Advances in debt and more efficient use of capital structures are obvious ways for companies to offset the economic malaise that sets in toward the end of business cycles and continue to drive stock prices higher. It is when companies stop borrowing because they become more cautious on their capital structures or credit markets tighten that bull markets fail to get extended.
Total debt for non-financial companies in the S&P 500 has increased by more than $1tn since the beginning of 2010. This has fueled the surge in payouts… Companies in the S&P 500 have a cash flow deficit of approximately $150bn per year that must be funded in the investment grade credit market to maintain the current level of share repurchases. While this may be a sustainable amount given the easy conditions and low rates in high grade credit, the days of accelerating growth in borrowings are likely in the past, in our view. This is because some important measures of debt sustainability, such as the ratio of debt-to-EBITDA are already elevated, as shown in Figure 9. The median debt-to-EBITDA ratio of the non-financial companies in the S&P 500 has reached 2.3x, a measure unmatched since 2000, which is the earliest year that we have reliable data.
In other words, the highest in history. Here is Barclays’ conclusion:
“Similar to our view on payout ratios limiting dividend growth, we believe debt-to-EBITDA has reached a point where it is becoming a constraint on additional leverage.“
While we would be the first to agree, so far companies have proven very resilient to recurring warnings that “peak debt” has arrived, almost exclusively thanks to central banks which continue to force investors to chase what little yield remains, ostensibly in corporate debt – the BOE’s launch of corporate debt monetization today being a perfect example this morning – while ignoring all the flashing red signs.
