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4 Stocks With A Better Debt Outlook Than The U.S.
The big market news last week was rating agency S&P revising its credit outlook on the AAA rating of U.S. debt from stable to negative. Years ago, such an event would have been unthinkable, but thanks to record spending and heavy doses of monetary stimulus, today's reality is a lot less pleasant. Many consider this warning from S&P as a call to both political parties to resolve our nation's deficit issues.
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Taking a Cue from Business
While the U.S. still holds the coveted triple-A debt rating, it's no longer a guarantee that such a rating will remain in place. It's not hard to understand why when you observe the situation from a business perspective. Government, in essence, is a business. It collects revenues and spends to provide services. While the U.S. has the advantage of printing money, that power can not remain unchecked without severe consequences. Just like a company, when you have too much debt, you risk jeopardizing your business. In the case of the US, the risk is higher interest rates in order to entice borrowers to invest in our securities. (For more, see How Countries Deal With Debt)
Better than Treasuries?
Currently, four non-financial US companies have a better outlook on their debt ratings than the U.S. government. In other words, if things stay the same, the rating agencies are essentially saying that the debt of these four companies is safer to own than U.S. Treasuries. It should come as no surprise that Microsoft (Nasdaq:MSFT) is one of the names. Microsoft is like its own little country, but with an enviable balance sheet: a market cap of $214 billion, $10 billion in debt and $40 billion in cash, for a "surplus" of $30 billion. And today, shares yield over 2%. (For more, see Stocks OK Despite Debt Downgrade.)
As the most valuable company in the world by market cap, Exxon Mobil (NYSE:XOM) also makes the list. Exxon has a market cap of $429 billion, $15 billion in debt and $7.8 billion in cash, or a net "deficit" of $7 billion. However, XOM generated over $20 billion in free cash flow in 2010, $6 billion in 2009 and over $40 billion in 2008.
The third name is no stranger either: Johnson and Johnson (NYSE:JNJ), arguably one of the most successful businesses over the past 100 years. As a leading global health products maker, JNJ has demonstrated one of the most stable track records of any blue chip name. Shares yield 3.4%, in line with 10 year Treasuries but with the equity upside. The fourth and most surprising name on the list is Automatic Data Processing (NYSE:ADP). ADP is the largest outsourcer to employers in the United States. They provide vital services to small businesses and has been doing so since 1949. The company has no net debt and also yields 2.7%.
Bottom Line
One could argue that buying these businesses would be a safer bet than U.S. Treasuries if the shares were held over a period of many years. This may sound like heresy to many conservative investors, but remember that these businesses have been around for decades - if not centuries - and all provide essential services in today's world; just like our government but with a much better balance sheet and more discipline. (For more, see Government Debt: From Billions to Trillions.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Tutorial: Economics Basics
Taking a Cue from Business
While the U.S. still holds the coveted triple-A debt rating, it's no longer a guarantee that such a rating will remain in place. It's not hard to understand why when you observe the situation from a business perspective. Government, in essence, is a business. It collects revenues and spends to provide services. While the U.S. has the advantage of printing money, that power can not remain unchecked without severe consequences. Just like a company, when you have too much debt, you risk jeopardizing your business. In the case of the US, the risk is higher interest rates in order to entice borrowers to invest in our securities. (For more, see How Countries Deal With Debt)
Better than Treasuries?
Currently, four non-financial US companies have a better outlook on their debt ratings than the U.S. government. In other words, if things stay the same, the rating agencies are essentially saying that the debt of these four companies is safer to own than U.S. Treasuries. It should come as no surprise that Microsoft (Nasdaq:MSFT) is one of the names. Microsoft is like its own little country, but with an enviable balance sheet: a market cap of $214 billion, $10 billion in debt and $40 billion in cash, for a "surplus" of $30 billion. And today, shares yield over 2%. (For more, see Stocks OK Despite Debt Downgrade.)
The third name is no stranger either: Johnson and Johnson (NYSE:JNJ), arguably one of the most successful businesses over the past 100 years. As a leading global health products maker, JNJ has demonstrated one of the most stable track records of any blue chip name. Shares yield 3.4%, in line with 10 year Treasuries but with the equity upside. The fourth and most surprising name on the list is Automatic Data Processing (NYSE:ADP). ADP is the largest outsourcer to employers in the United States. They provide vital services to small businesses and has been doing so since 1949. The company has no net debt and also yields 2.7%.
Bottom Line
One could argue that buying these businesses would be a safer bet than U.S. Treasuries if the shares were held over a period of many years. This may sound like heresy to many conservative investors, but remember that these businesses have been around for decades - if not centuries - and all provide essential services in today's world; just like our government but with a much better balance sheet and more discipline. (For more, see Government Debt: From Billions to Trillions.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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