Who's going to stay in business when the economy is tanking?
http://www.usatoday.com/money/companies/2002-08-21-debt-free_x.htmCompanies with no debt fly high
By Matt Krantz, USA TODAY
Microsoft, Walgreen, Cisco Systems and William Wrigley have something in common that may surprise you. None of them has any debt.
Unlike companies such as WorldCom, US Airways and Vivendi Universal, which have choked on their debt loads, companies that avoided the temptation to borrow during the boom are looking smart. Now that the economy has slowed, they don't have ominous interest payments that've caused their overaggressive rivals to blow up.
"What kills companies is debt," says Peter Andrew, analyst at A.G. Edwards. "Without debt, companies have the financial wherewithal to survive."
Debt-free companies
The largest debt-free companies, in terms of revenue:
Microsoft
Walgreen
Cisco Systems
Gateway
CDW Computer Centers
Family Dollar Stores
Ross Stores
Gevity HR
C.H. Robinson Worldwide
Bed Bath & Beyond
Source: USA TODAY research
Several large companies say staying debt free is part of their strategy:
* Cisco has never borrowed money and doesn't plan to. The networking company uses the cash it generates to fund expansion. Last quarter, the company threw off $1.6 billion in cash from operations.
Not having debt has helped Cisco hold up much better than rivals during the vicious downturn. Cisco earned $772 million during its most recent quarter, while Lucent lost $7.9 billion. Having interest to pay on $3.2 billion in debt hasn't helped Lucent.
* Walgreen says its drugstores generate enough cash to pay for its expansion. Its philosophy of being debt free is similar to a consumer who pays credit cards off every month, says spokesman Michael Polzin. "We're the pay-as-you-go type," he says. Its shares are just 9% below their 52-week high.
Meanwhile, Rite Aid, its former rival, is struggling with a $3.7 billion debt load. Rite Aid's shares are 76% off their 52-week high. * Wrigley doesn't have a policy banning it from borrowing, but the chewing-gum maker says it has never had long-term debt since being founded more than 110 years ago.
* Ross Stores, a discount apparel retailer, has structured its business so it doesn't have to borrow. Excess cash generated from existing stores allows the company to expand the number of stores by 12% a year, says spokesman Katie Loughnot. And new stores only cost $1.3 million in cash to open, yet generate about $6 million in revenue in their first year. That means they pay for themselves in about two years.
The debt load on companies has been steadily increasing, hitting a record $4.9 trillion in the second quarter of 2002, estimates John Lonski, chief economist at Moody's Investors Service. But companies may be having second thoughts. Debt outstanding among non-financial companies rose just 2.8% in the second quarter, well below the 6.1% growth a year ago and 11.9% in the second quarter of 2000, he says.
But companies that resisted are glad now. "The companies that were a little more conservative with their money are better off," says Tom Galvin, spokesman for debt-free Internet company VeriSign.