Debt/Equity?

[Pete]

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?

 

[CyclingInvestor]

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

 

[brewer12345]

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.

 

[Gone4Good]

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.

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.

 

[clifp]

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.

 

[Pete]

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.

 

[haha]

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

 

[clifp]

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.