Corporate balance sheets reveal surprising strength

Tuesday, 23 March 2010, 23:37 IST   |    3 Comments
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Corporate balance sheets reveal surprising strength
Bangalore: Several large-cap companies in the U.S. have shrunk debt and other obligations over the past year, despite the global meltdown, reports Ben Steverman from the BusinessWeek. According to an analysis of Bloomberg data on nonfinancial companies in the Standard & Poor's 500 - stock index, the average large-cap company has shrunk liabilities on its balance sheet by 8.2 percent. The liabilities on a company's balance sheet include its debts, as well as any other financial obligations, such as those toward pension plans. "It's a mixed bag, as some institutions have been able to pay down debt quite a bit," says Michael Yoshikami, President and Chief Investment Strategist at Ycmnet Advisor. Bond markets have revealed concerns about the U.S. government's fiscal status. The federal government had $11.9 trillion in debt outstanding at the end of the 2009 fiscal year, up 19 percent from 2008. The large-cap S&P 500 is split almost evenly between companies that have reduced their liabilities and those that have increased them. Over the past 12 months, 218 companies have used a variety of methods to slash a total of $265 billion from balance sheet liabilities. Cutting the most - in dollar and percentage terms - was Time Warner, which reduced its liabilities by $36.4 billion, or 53.2 percent. However, more 194 companies have increased their balance sheet liabilities over the past year, by a total of $309 billion. The leading company was Pfizer, which boosted its liabilities $69.1 billion in a year. The pharmaceutical giant borrowed $22.5 billion to finance its acquisition of Wyeth. Even in the same industries, companies have taken opposite stances. Some have paid off debts so as to maintain maximum financial flexibility while competitors have borrowed to raise extra cash at a time of record - low interest rates. In the past year, King Pharmaceuticals cut 52 percent of its liabilities, a total of $1 billion. Biotechnology company Amgen added $1.4 billion, or 9.1 percent, to its liabilities. Though many of the patents are expiring soon, King's pain drugs generate strong cash flow, enabling the company to slash liabilities, Morningstar Analyst Debbie Wang notes. "They want to clean up their balance sheet and store away cash so that they can make an acquisition," she says. Possibly hunting for acquisitions, too, are Amgen and other health care companies, but Wang notes they've decided to raise extra cash now, by borrowing. Amgen and other health care companies "have decided the current rates are so attractive that they've taken on more debt," Wang says. Overall, nonfinancial S&P 500 companies had liabilities of $5.8 trillion in their most recent quarter, a $44 billion increase - 0.75 percent - from 12 months ago. Companies used a variety of methods to strengthen balance sheets, even though in many cases sales were falling because of the recession. Alternative approaches to strengthening balance sheets are demonstrated by Ford (F), the second-largest cutter of liabilities, and General Electric (GE), No. 3. Company balance sheets may have improved in the past year, but don't expect them to shed debt at the same rate in 2010, says Dave Novosel, senior analyst at research firm Gimme Credit. Many companies will instead turn extra cash into dividends and stock buybacks, Novosel says, adding, "A lot of companies are now feeling the pressure to return cash to shareholders."