Until Debt Do Us Part

Unless you have been living on another planet the past few months, you know that interest rates have been rising because the Federal Reserve has been raising rates to curb inflation. It means higher borrowing costs when you go purchase a car, a house, or even higher interest rates on credit card debt. It also means higher costs for the Government to service their massive national debt, but that is a rant for another day. Right now, I want to focus on how it may impact some individual companies.

During the 'easy money' years, when rates were at or near zero, companies could borrow millions, or even billions, of dollars at nominal rates to help finance their growth. Some companies decided that along with using debt to finance growth, they would also use it to subsidize stocks buybacks and dividends. What a great idea... that is until rates start to rise. Many of these companies would borrow money with terms to pay back the principal in 5 years with interest. Once it neared the 5 years, they would then refinance the debt so they could get more time to pay the principal down at the same or at an even better rate... ie. kicking the can down the road.

What happens when the 'easy money' years end?

I guess we will find out...

When you are a company like AAPL with $167 billion in cash holding $109 billion in debt at basically zero interest it is not a problem in a rising rate environment. But when you are a company like Domino's Pizza ($DPZ), who has $5 billion in debt but only $138.5 mil in cashon hand with $2 billion in principal due in 2025, there is going to be a problem.

Couple that debt issue with a possible unexpected business slow-down due to GLP-1 drugs and you have a big, big problem. At best, the dividends and stock buybacks financed by the debt will go away. At worst, the dividends and stock buybacks go away and the cost to service the debt becomes unsustainable. Either way, think the market is not pricing either of those two scenarios into DPZ and many other stocks using similar strategies to appease shareholders like AZO($7.7 bil debt) , ORLY($7.1 bil debt), and SHW($11 bil debt)... there are many others.

Will have a more detailed post on the topic in the coming days. Just a disclaimer, holding puts in SHW and DPZ and may add more puts and/or close the position at anytime.

Happy Trading!


JimmyBob (Scott)has been trading equities for over 15 years, a majority of which were OTC micro-cap stocks. He started trading high risk stock options over the past 7 years, and has proven winning trades in excess of 15,000%.

As one of the Co-Founders of optionmillionaires.com, Scott enjoys sharing his knowledge with other investors through timely blog posts, daily watch lists in the forum, weekly webinars, and helpful advice within the chatroom.

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