How Indebted Is The FTSE 100?

Published in Investing on 11 July 2011

Only one of the UK's largest companies has net cash on its balance sheet.

Last week we took a peek at The Top 20 UK Shares, seeing how they stacked up in terms of price earnings (P/E) multiples and dividend yield.

Useful as these simple metrics are, they are just one piece of the puzzle when it comes to determining whether any given share is good value or not. Another key metric all good Fools look at is a company's cash position. We need to see how well a share can weather the inevitable economic storms that it will face over its lifetime. 

So let's review the same group of top UK shares to see how they fare:

CompanyMarket cap
Net debt
Debt /
Market cap
BHP Billiton (LSE: BLT)1480.20%
Royal Dutch Shell (LSE: RDSB)14216.211%
BP (LSE: BP)8716.619%
Vodafone (LSE: VOD)8431.437%
GlaxoSmithKline (LSE: GSK)718.412%
Rio Tinto (LSE: RIO)672.54%
Unilever (LSE: ULVR)625.89%
British American Tobacco (LSE: BATS)577.814%
BG Group (LSE: BG)485.411%
AstraZeneca (LSE: AZN)43-0.7Woo hoo,
net cash!
Anglo American (LSE: AAL)414.611%
Xstrata (LSE: XTA)414.912%
SAB Miller (LSE: SAB)374.612%
Tesco (LSE: TSCO)338.225%
Diageo (LSE: DGE)327.122%
Reckitt Benckiser (LSE: RB)252.08%
Imperial Tobacco (LSE: IMT)2210.347%

Source: Bloomberg

This time around, we're ignoring banks. As their business is dealing with money, they don't have a net cash or net debt position that's comparable with other companies.

It's also worth bearing in mind that the above figures are taken from a database, and so may contain the odd error (it's always advisable to check the original data from the company concerned before making any investment decision). The net debt figures in the table should be for the company's last year end.

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A unique net cash situation

Let's give AstraZeneca a special mention, for being the only company on our list that can boast a net cash position (although BHP Billiton comes within a whisker, if you can call £200m a whisker). 

I have to say, I was a little surprised by the scarcity of net cash. We often hear how cash flush big US companies are, such as Apple (NASDAQ: AAPL.US) and Microsoft (NASDAQ: MSFT.US), but their UK cousins don't seem to share this good habit. 

I suspect much of the blame for this can be levelled at the City, where it's long been fashionable to think that companies should gear their balance sheets to become more 'operationally efficient'. I'm sure US companies face similar calls from Wall Street, but it would seem that common sense prevails.

As with most financial theories, when it comes to the real world, they are absolute tosh. True, some companies have steadier business models, and so can usually cope with a higher level of debt. But give me a staid, old-fashioned cash-rich company every time.

The most indebted

Imperial Tobacco wins this particular booby prize, with net debt of nearly half its market value. Vodafone isn't too far behind, a legacy of its past where huge acquisitions and multi-billion pound 3G licence bids were the order of the day.

The rest of our group doesn't look too heavily weighed down, although the debt situation at both Tesco and Diageo is worth watching. There are no other big retailers in our group to compare Tesco against, but Diageo has noticeably more debt than similar outfits, such as Unilever and Reckitt Benckiser.

And finally, despite the payouts that BP is having to make for the Gulf of Mexico disaster, it's not particularly overburdened by debt at the moment. 

All in all, I'd give this group a C+. Not bad, but plenty of room for improvement. After all, the main purpose of a business is to generate cash for its shareholders.

More on the markets:

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> The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline, Reckitt Benckiser and Tesco.

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kiffberet 11 Jul 2011 , 3:52pm

It's interesting that VOD prefer to buy back shares, rather than pay off debt. I'd have thought paying off debt would also boost the share price if that was the intention of the buy backs...

BarrenFluffit 11 Jul 2011 , 4:50pm

You could argue that current debt is a sign of higher future profits; they do it for a reason.

ANuvver 11 Jul 2011 , 6:06pm

Yup, and you could also argue that the recent debt market climate has made forays into the bond market attractive for well-rated large caps.

mcturra2000 11 Jul 2011 , 6:18pm

I heard that Unilever was expanding into China, borrowing money at some silly rate like 1.5%. Considering that China's rate of inflation is higher than that, they are effectively getting the money for nothing. The FD said he was happy with the bond float. Yip, I don't doubt that for an instant.

vinchainsaw 11 Jul 2011 , 9:56pm

Dont think I'd touch a share with a net cash position when lending rates are so low.
That would indicate management dont think they can get a better return than the lending rate. Wouldnt seem to indicate that management had much confidence of expanding operations going forward either.

UncleEbenezer 12 Jul 2011 , 1:55am

US companies have net cash ... UK companies pay dividends. Different cultures!

(yes of course there's overlap, but you get my drift ...)

TMFFlaneur 12 Jul 2011 , 10:20am

To stir things up, I'll also say I don't mind debt for the biggest blue chips at the moment. They have no problem getting finance and can access the markets directly. In fact, you could almost argue net cash is a sign of weakness at the moment!

I wrote at the end of 2010 that I preferred buybacks to dividends even:

This is unusual, and at normal rates and in a bull market I'd prefer cash and dividends. But these are not normal times! :)


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