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As governments on both sides of the Atlantic struggle with massive debt obligations, investors are starting to recognize once more the value of a clean balance sheet. With corporate earnings well off their lows during the recession, some companies are taking the opportunity to pay down their debt loads, leaving them in an ideal condition to weather whatever storms may come in the near future.
Below, I'll reveal the names of five stocks that have scrubbed their balance sheets to a polished shine. But first, let's take a look at what a debt-free balance sheet means for a company -- and whether it's a good thing for investors.
Is corporate debt good?
It's easy to have the impression that debt is always a bad thing for companies. But like most tools, debt can be good or bad depending on how a company's managers choose to use it.
What's indisputable, though, is that corporate debt is immensely popular. According to Federal Reserve data, corporate debt is at its highest level on record, with nonfinancial companies collectively owing $7.3 trillion as of the first quarter of 2011 -- even more than they owed before the financial crisis hit.
From the corporate perspective, it's easy to understand why. With very low interest rates, the immediate cost of borrowing for companies is extremely low. Even cash-rich companies have taken the opportunity to raise more capital by issuing long-term bonds at what they clearly see as attractive rates.
The question, though, is what to do with that cash. In theory, if a company can make investments that yield greater returns than their cost of borrowing, then issuing debt to finance those investments should be beneficial to shareholders.
But too often, companies make expensive mistakes with their cash. Sometimes, they make strategic acquisitions at premium prices. At other times, they buy back their own shares, no matter how bad a value their stock might be. And these days, many companies are simply sitting on their cash -- presumably earning even less than what they're paying in interest.
Making the sure move
In that light, seeing companies that are taking the sure path by getting rid of debt entirely is reassuring to shareholders. That's why I took a look at S&P 500 companies that made major cuts to their debt loads over the past year. Here are the five stocks I found that reduced their corporate borrowing all the way to zero.
Amount of Debt Paid Off
|Akamai Technologies (Nasdaq: AKAM )||$199.7 million|
|Amazon.com (Nasdaq: AMZN )||$131 million|
|DeVry (NYSE: DV )||$44.8 million|
|FLIR Systems (Nasdaq: FLIR )||$58.5 million|
|LSI Corp. (NYSE: LSI )||$350 million|
Source: Capital IQ, a division of Standard and Poor's.
As you can probably tell from the raw numbers, none of these companies were truly in any serious danger from stresses to their balance sheets. But that's exactly what you'd expect to see from companies that are prudent and conservative in their capital allocation strategies. By contrast, Ford (NYSE: F ) , which has made huge strides toward cutting its debt and achieving an investment-grade bond rating for the first time since 2005, has been struggling for years to get its balance sheet under control. In other words, if you never get into trouble in the first place, it's a lot easier to keep things clean even during tough times.
A couple of other stocks earn honorable mentions: Quanta Services and Whole Foods (Nasdaq: WFM ) . Quanta eliminated 99% of its $128.1 million in debt from last year, just missing this list. And Whole Foods cut its $729 million debt by a whopping 71% -- a bigger reduction in dollar terms than any of the six other companies mentioned here.
Of course, just because a company doesn't have debt on its balance sheet doesn't mean it's guaranteed to succeed. But with credit risk dominating the headlines lately, it's nice to know that these companies have at least one thing they don't have to worry about.
Prudent use of debt is an important consideration in figuring out which stocks are great, but it's not the only one. Our free report "5 Stocks The Motley Fool Owns -- And You Should Too" includes some great stock ideas for your consideration, along with useful explanations about why they're poised to pop.