S&P 500 CEOs Lose Interest Advantage for 2013

Companies have cut borrowing expense to the lowest level since 2002, making it harder to squeeze costs.

Companies in the Standard & Poor’s 500 Index are paying less in interest on debt than any time in at least a decade, leaving investors more dependent on economic growth and corporate spending for equity gains in 2013.

Constituents of the benchmark gauge for American stocks such as Exxon Mobil Corp. and Walt Disney Co. cut interest expenses to 2.39 percent of sales in the 12 months ended Sept. 30 on average, the lowest level since at least 2002, according to data compiled by Bloomberg and Strategas Research Partners. With borrowing expenses at record lows, executives are finding it harder to squeeze costs, causing profit margins to contract for the first time since 2009.

Declining Expense

Interest expense at S&P 500 companies has been declining for the past three years after the Federal Reserve cut its benchmark lending rate to near zero in December 2008. Lower costs have helped profits climb for 10 straight quarters, surpassing analyst estimates every quarter this year, data compiled by Bloomberg show.

Ketchup Maker

While the largest ketchup maker has exceeded profit projections since 2011, Johnson reaffirmed his fiscal 2013 forecast, citing uncertainties about the U.S. budget, China and consumer confidence during the Nov. 20 call. The stock is down 0.8 percent since reporting earnings that beat analyst projections and the margin rose to its highest since 2009.

Interest Rates

“It’s hard to imagine the interest rate environment getting much more favorable,” he wrote. “The Street’s lofty EPS estimate for next year must be substantiated by margin expansion, strong top-line growth, or a combination of both. In an environment of peaking margins and 4 percent nominal GDP growth, it’s tough to see how we’ll get there.”

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