Debt Won't Doom These Dow Stocks
Corporate America has a lot of cash on hand right now. Having learned their lessons from the financial crisis of 2008 and the credit crunch that came with it, most companies are trying to avoid repeating mistakes that they made in leaving themselves exposed to too much credit risk. Even as some cash-rich companies seek to ramp up plans to return capital to shareholders in the form of dividends and share buybacks, they're still maintaining big enough war chests to keep all their strategic options open.
But that trend hasn't kept other companies from keeping plenty of debt on their books, too. Within the companies that make up the Dow Jones Industrials (INDEX: ^DJI) , many have business models that pretty much rely on debt. Others have resorted to debt issuance to finance ambitious projects. But are these companies taking on more than they can handle? Let's take a closer look at Dow stocks that have to handle massive debt loads.
Banking, leverage, and you
Any look at debt has to focus first on financial companies. If you look at the balance sheets of Dow members Bank of America (NYS: BAC) and JPMorgan Chase (NYS: JPM) , you'll find both assets and liabilities that make their non-bank Dow peers look puny by comparison.
The explanation lies in how banks make money. Banks are in the business of borrowing and lending money, taking deposits from savers and then lending out money to borrowers. As a result, banks always show substantial assets and liabilities.
Looking back, however, the long-term debt levels at JPMorgan and B of A have actually shrunk a bit since the end of 2010. B of A's entire balance sheet has contracted somewhat as it sheds non-core assets and tries to consolidate its capital position, and long-term debt now stands at $355 billion. But JPMorgan's overall assets and liabilities have continued to grow even as long-term debt shrank slightly to just over $600 billion at the end of the first quarter of 2012.
Those figures are consistent with shrinking leverage, which many analysts foresaw as the result of increased regulation and greater scrutiny of the banking system in general and of large, too-big-to-fail banks in particular. The fact that both banks passed the Federal Reserve's stress tests was a positive sign that they could potentially do better in any repeat of 2008's troubles, but debt will always pose some threat to the banking system.
Banking behind the scenes
General Electric (NYS: GE) doesn't look like a bank, but in some ways, it acts like one. With about $355 billion in loans, leases, and "other assets" related to the company's financial division on its balance sheet, much of GE's roughly $500 billion in what GE calls deposits, borrowings, and non-current liabilities is tied to that segment of its overall business.
GE has taken steps to shrink its finance segment, and those efforts are quite apparent on the asset side of the balance sheet. The company's long-term debt has also fallen sharply since its peak years of 2007 to 2009. GE hasn't fully recovered from the damage it suffered during the financial crisis, but a re-emphasis on its industrial businesses appears to be paying off for the company.
Can you hear the debt piling up now?
Topping the true non-financials in debt are AT&T (NYS: T) and Verizon. Wireless networks are expensive things to build, and AT&T has had elevated debt levels since 2006. Verizon started leveraging up its balance sheet more recently, with a big spike in 2008.
Since then, though, the two companies have kept their debt loads relatively stable. With any luck, they'll be able to start paying down existing debt before the next big round of capital expenditures hits the industry. In the meantime, smart capital management will be useful to help prevent any cash crunch from hitting the U.S. telecom giants -- especially given how much the companies rely on paying out big dividends to their shareholders.
Low interest rates and freely available capital make debt look a lot less ominous than it did four years ago. But keeping an eye on debt levels is always smart to make sure the stocks you own aren't riskier than you think.
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At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. You can follow him onTwitter. The Motley Fool owns shares of JPMorgan Chase and Bank of America. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool has adisclosure policy.
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