Given the rock-bottom interest rates, companies have jumped at the opportunity to issue new debt, especially in the U.S., where Wal-Mart Stores Inc. just issued $5-billion (U.S.) and tied a record for the lowest yield on three-and-five-year unsecured corporate bonds.
Despite the chance to refinance by issuing debt to repurchase shares, there hasn't been an abundance of buybacks. In a research note this morning, UBS analyst Vishal Shreedhar says that makes sense for some companies because they simply don't have the balance sheet room to take on more debt. In Canada, however, he says consumer stocks are particularly well-positioned to do so.
Most importantly, because their earnings are typically the least volatile, consumer stocks can maintain stable debt payments.
"When a balance sheet is strong, the cost of financing is low, and valuation is good, we think it is difficult for a company to defend preserving capital on its balance sheet," Mr. Shreedhar said. However, he does note that should the economy waver, companies will be inclined to preserve capital once again.
Moreover, UBS did some research and found that net debt to both assets and equity is very low relative to levels seen over the past few decades. Excluding financials, current Canadian corporate net debt to assets sits at 22 per cent; 10 years ago that ratio hovered around 50 per cent. The levels are even lower for consumer stocks, which currently have a net debt to assets ratio of 15 per cent.
Examples of the names studied include Forzani Group Ltd. , Alimentation Couche-Tard Inc. and Metro Inc.
Of all the names UBS looked at, Jean Coutu came out with the highest benefits from buying back shares. Although the company already has a 5 per cent buyback in place, UBS suggests the company could benefit from extending that to an even higher level. According to their calculations, Jean Coutu could gain 8.8 per cent earnings per share accretion, even if Quebec drug reform is put into place.
Tim Kiladze