Corporate balance sheets are not as robust as they use to be. According to Moody’s, U.S. investment grade companies at the end of last year held cash equal to 35% of adjusted annual earnings, compared to an average of 43% in 2013 and 51% in 2009. Additionally, the ratio of cash-to-debt has dipped to 14% in the third quarter of 2014, the lowest since 2007.
“Credit quality is beginning to erode,” Robert McAdie, head of research at BNP Paribas, said in the article. “There will be downgrades, not defaults. But we are seeing the virtuous cycle end.
If these companies find it harder to service their growing debt burden, buyback stocks funds, like the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), and dividend stock ETFs, like the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), could also take a hit since these areas would see cuts first as companies payoff loans. For instance, the energy sector has already cut buybacks and some long-time dividend growers are even considering dividends next in response to the plunge in oil prices. Additionally, after the financial crisis, many banks enacted measures like buyback and dividend cuts to put their houses in order.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.