Shareholders have certainly been rewarded in recent quarters, as recent tax cuts from the Trump Administration in the U.S., combined with increased government spending promises in the U.S. and Canada and a renewed NAFTA (now USMCA) have given large corporations the ability and confidence to increase share buyback programs and dividends.
The significant tax windfall has been good for investors (increased stock buybacks and dividend increases) and bondholders (lower risk due to increased cash flow in the short-term), but questions have begun to arise as to how long companies can continue to increase distributions to shareholders in this current environment, given the oversized debt many firms have relative to historical averages.
By some measures, corporations in North America are now leveraged to a level which has not previously been seen.
Corporate market debt has been one of the fastest growing asset classes due partly to still-low interest rates and an improving macroeconomic picture which has made lenders more susceptible to handing out larger loans.
With debt reduction and balance sheet stability likely to continue to increase in importance to investors, focusing on buying companies right now with solid balance sheets could potentially serve investors well in the years to come, for a few reasons.
First, investors looking for a relatively safe investment today will be paying closer attention to debt levels now than in previous years. Second, the safety of investing in such companies in an economic downturn, as a hedge of sorts, cannot be underestimated.
Invest wisely, my friends.
