Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Debt/Equity?
Old 03-02-2011, 07:56 AM   #1
Recycles dryer sheets
Pete's Avatar
 
Join Date: May 2008
Posts: 350
Debt/Equity?

I recently read Dividend Investing for Dummies. Among many other things, it suggested picking stocks with a debt/equity ratio of < or = 1. I've always thought of Altria as a great dividend stock but I see they have a ratio of 235. With a recent price of $25, does this mean (25 x 235) $5875 worth of debt per each share of stock I own? Am I wrong? How else can I read this?
__________________

__________________
Pete is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-02-2011, 10:00 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Location: Los Angeles area
Posts: 1,329
I do not follow MO, but according to their Yahoo balance sheet, they have about $37b in assets and $32b in debts, with a market cap of $52b and earnings of about $5b this year. It looks pretty reasonable to me. I do not know the math behind a d/e ratio of 235.

MO Balance Sheet | Altria Group, Inc. Stock - Yahoo! Finance
__________________

__________________
learn, work, save, invest, fire
CyclingInvestor is offline   Reply With Quote
Old 03-02-2011, 11:20 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 14,795
For a variety of reasons, debt/equity is a mostly useless credit statistic, IMO. For a firm like this I mostly focus on Debt/EBITDA, Ebitda/Interest and the like.
__________________
"To be a man means that you are brave, loyal and true. When you are in the wrong, you own up and take your punishment. You don't take advantage of women. As a husband, you support and protect your wife and children. You are gracious in victory and a good sport in defeat. Your word is your bond. Your handshake is as good as your word... When the ship goes down, you put the women and children into the lifeboats and wave good-bye with a smile." C Murray
brewer12345 is offline   Reply With Quote
Old 03-02-2011, 02:17 PM   #4
Thinks s/he gets paid by the post
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 4,537
Quote:
Originally Posted by brewer12345 View Post
For a variety of reasons, debt/equity is a mostly useless credit statistic, IMO.
Agree.

Besides, a one sized fits all credit metric for all industries makes no sense. A 50/50 levered oil company likely has too much debt while a similarly leveraged utility has a very healthy balance sheet. In fact, if dividend investors use the rule that Debt to Equity should be less than 1 to 1, they'll almost be out of the utility sector altogether, even though it accounts for ~30% of the Dow Jones Select Dividend Index.

Quote:
Originally Posted by Pete View Post
I've always thought of Altria as a great dividend stock but I see they have a ratio of 235. With a recent price of $25, does this mean (25 x 235) $5875 worth of debt per each share of stock I own? Am I wrong? How else can I read this?
When people talk about Debt to Equity they're usually talking about book equity, not market equity. If that is the case with the number you're referring to, you can't draw any conclusion about how much debt they're carrying per share.
__________________
Retired early, traveling perpetually.
(find more details on my "About Me" page).
Gone4Good is offline   Reply With Quote
Old 03-02-2011, 05:55 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 6,675
Quote:
Originally Posted by Pete View Post
I recently read Dividend Investing for Dummies. Among many other things, it suggested picking stocks with a debt/equity ratio of < or = 1. I've always thought of Altria as a great dividend stock but I see they have a ratio of 235. With a recent price of $25, does this mean (25 x 235) $5875 worth of debt per each share of stock I own? Am I wrong? How else can I read this?
Somebody got a decimal point in the wrong place. According to Morningstar, MO Debt to equity ratio is 2.35 which is a perfectly reasonably ratio for a slow/no growth business with predictable cashflow. M* star credit rating for the company is BBB.

While I agree that EBITA/interest is probably a better measure of the ability of company to pay maintain dividends. Debt to Equity is a more widely reported measure and reasonable indicator for conventional business like tobacco, although it fails miserable for many other business.
__________________
clifp is online now   Reply With Quote
Old 03-03-2011, 05:26 PM   #6
Recycles dryer sheets
Pete's Avatar
 
Join Date: May 2008
Posts: 350
Quote:
Originally Posted by clifp View Post
Somebody got a decimal point in the wrong place. According to Morningstar, MO Debt to equity ratio is 2.35 which is a perfectly reasonably ratio for a slow/no growth business with predictable cashflow. M* star credit rating for the company is BBB.
I think the 2.35 is a number to measure this company against others in the same industry. I looked in many other places and the number stands at 235.
Investopedia does a good job of defining debt/equity.
Debt/Equity Ratio Definition

BBB is defined as "An obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments"

Perhaps it's because they carry so much debt.
__________________
Pete is offline   Reply With Quote
Old 03-03-2011, 10:52 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 19,878
I believe that debt to equity is meaningless for a high ROA company with low capital needs. These companies routinely buy back shares, often borrowing to do so. While if done wisely this puts the shareholder in a better position, it often drives down equity and in fact equity may go negative. In particular, there are many excellent companies with negative tangible equity.

Ha
__________________
Insanity in individuals is something rare-but in groups, parties, nations and epochs, it is the rule-Friederich Nietzsche
haha is offline   Reply With Quote
Old 03-03-2011, 11:25 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 6,675
Quote:
Originally Posted by Pete View Post
I think the 2.35 is a number to measure this company against others in the same industry. I looked in many other places and the number stands at 235.
Investopedia does a good job of defining debt/equity.
Debt/Equity Ratio Definition

BBB is defined as "An obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments"

Perhaps it's because they carry so much debt.
Reading a bit more in some place D/E ratio is expressed as percentage. So 235% = 2.35. Meaning you want to find companies with debt less than 100% of equities.

So all of the financial sources are in agreement just expressing the number differently.

In general you only get the ridiculously high >20 D/E ratios when a formerly profitable company losing money for many years and is rapidly decreasing it is former profits (i.e. retained earnings). In the case of Altria it has been a profitable company for decades I believe, and while it pays I high percentage of earning in the form of dividends it does retain some earnings.

I have a small position in the company.
__________________

__________________
clifp is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Equity Is Altering Spending Habits and View of Debt Craig FIRE and Money 6 02-21-2009 12:25 PM
Revolving debt, home equity I must have it now syndrome newguy88 Other topics 35 05-20-2007 11:29 AM
Secured debt (HELOC) vs Unsecured debt (credit card) Sue J FIRE and Money 6 03-07-2007 10:02 PM

 

 
All times are GMT -6. The time now is 07:06 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2014, vBulletin Solutions, Inc.

Early Retirement News right to your Email!

Stay up-to-date with all the latest news to your inbox!

unsusbcribe at anytime with one click

Close [X]