In the last post (“Headwinds Facing Future Corporate Profitability“) one of the factors I discussed was the impact that rising interest rates have had on corporate profitability.
As I indicated in that post, I believe there are various impacts, both “direct” and “indirect,” that low interest rates have had on corporate earnings. Two recent article discuss what (I consider “direct”) impact low interest rates have had on overall corporate profitability, as depicted by S&P500 earnings.
The first is seen in the Wall Street Journal of July 23 and is titled “Fed Plays Part at the (Profit) Margins.” This artice discusses the impact of low interest rates on S&P500 margins. Two excerpts from the article:
But an analysis conducted by independent strategist Brett Gallagher shows that low interest rates have done much to bolster margins. Given the superlow interest-rate era may soon start drawing to a close, that could be another reason for investors to question just how long margins can hold up.
The lower rates have helped companies substantially lower their interest-rate costs. Mr. Gallagher found that in 2012, interest expenses—what companies had to pay to service their debt—came to 1.8% of sales for companies in the S&P 500. That compares with a 15-year average of 3.9%. Nor does this reduction in interest expense reflect a reduction in debt: Net debt as a percentage of assets stood at 14.2%, above the 15-year average of 11.5%.
Another article that discusses the impact that interest rates have had on corporate earnings is a Reuters article seen in the Chicago Tribune article of July 25 titled “Analysis: How much is Fed aid to U.S. corporate profits worth?” An excerpt from this article:
The Fed’s effect on corporate earnings is difficult to quantify. Van Batenburg estimates that corporate savings on interest expense after rates fell to historic lows has accounted for about 47 percent of S&P 500 earnings growth since 2009.
At the end of 2009, quarterly earnings per share for the S&P 500 were less than $20, and companies in the index paid about $4 a share in interest, van Batenburg said. Now the S&P 500 is generating about $26.70 a share in quarterly earnings but pays just $1.50 a share in interest.
StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.
StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.