Monday, December 30, 2019

Using credit cards to make ends meet

The clock is ticking when a family starts using new credit cards to "make ends meet". It is just a matter of time before the creditors start calling.

It is the same thing with corporations. Consider companies with BBB debt ratings, the lowest "investment grade" rating. Then, from that universe, see who has been borrowing money hand-over-fist. They are at swirling the drain.

Same image as above but trimmed and spun to make the names easier to read.
So, who has been taking on high interest-rate debt since 2017?

A surprising number of food companies:
Campbell Soups, Conagra Brands, Keurig/Dr Pepper, Altria Group, McDonalds, JM Smuckers, Consolidated Brands, Kraft Heinz Co.

Takeda, CVS, Becton Dickinson, Boston Scientific, Amgen, Walgreens

Communications and transportation:
Broadcom, AT&T; Fedex, United Technology, Union Pacific

There are basically three kinds of debt.

"Good" debt is money that is used to fund high profit-margin enterprises. An example would be the money used to build the factory and pay for the advertising for a break-through product like "Crocs".

"Neutral" debt is money that is used defensively to secure low profit-margin enterprises. An example would be competing drugstores putting stores on opposite corners in a neighborhood with barely enough business to support one drugstore.

"Bad" debt is money borrowed to cover the cost of old borrowing or to artificially juice-up stock prices by using the money to buy-back outstanding stock. Reverse dilution, if you wish.

1 comment:

  1. I'm not surprised to see food or healthcare on the list.
    Healthcare because in many ways the industry is getting squeezed by lower income and higher costs. Food? Because of inflation - higher wage costs, higher transport costs, higher food costs, and price sensitive customers. While package sizes are going down and costs up, I know that many food companies are holding off on price increases or keeping them as small as they can. That means smaller margins to help pay for renovations and upgrades, so the need for more loans.


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