5 months ago • 2 mins
The threat of higher-for-longer interest rates certainly has markets spooked right now. And that’s probably fair: higher rates will cut into consumer spending and will make it problematic (if not prohibitively expensive) for smaller companies to get loans. And all of that is sure to slow the economy, a prospect that no firm is relishing. But in the past when times have been tough, the strong have emerged even stronger. And when it comes to balance sheets – the first place to look if you’re worried about interest rates – giant US firms look positively fortress-like.
I recently took a look at 18 of the 20 biggest firms in the S&P 500 (leaving Berkshire Hathaway and JPMorgan out because their balance sheets are just a bit different) and found that collectively, they have about $560 billion in outstanding debt. All that debt would be staring down higher refinancing costs and would seem like a massive problem – if not for the fact that those same firms boast a whopping $680 billion in cash too. What that means is that as rates have moved higher, they’ve received more income on their savings – enough to potentially outweigh any extra interest they might face on their debt. Basically, it’s like having more cash in the bank than the size of your mortgage.
The Big Tech firms that dominate the S&P 500 are the main ones enjoying this “net cash” position. A bit lower down the list, firms like Broadcom, Home Depot, Merck, and Mastercard have more debt than cash. But, when you compare the debt for those firms to the profit they produce, even the worst positioned (Broadcom) is sitting pretty, at least relatively. The chipmaker's net debt – that’s debt minus cash – is just 1.4 times its profit. Broadcom could just let the profit pile up on its balance sheet and theoretically, in less than two years, it’d have enough cash to repay its debt.
I’d stop short of suggesting that higher rates should be celebrated inside the boardrooms of big corporate America, but when it comes to the direct costs of higher rates, I’d say there’s little to worry about here...
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