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Is Suffering Shareholder Return The True Cost of Dodd-Frank?

In recent months, companies like Apple and Home Depot turned to the debt markets to raise funds for share repurchases and dividend payments – an interesting capital allocation decision, since cash on hand has historically been used to fund buybacks and dividends. But one sector is not participating as fully.

An analysis by S&P Capital IQ Global Markets Intelligence (GMI) finds the financials sector currently has a lower leverage ratio than its 15-year average, due to regulatory constraints including those posed by Dodd-Frank.

GMI obtained data for long-term debt, common equity, and market capitalization for the 15 years ended in 2014 for all S&P 500 companies from S&P Capital IQ. We then aggregated the data for each year for all dividend paying stocks overall and by sector. We found that the aggregate average debt-equity and debt-market cap ratios for the 15-year period for dividend-paying financials sector stocks averaged 1.84 and 1.27, respectively. As of the end of 2014, however, the ratios were significantly lower at 1.05 and 0.79, respectively.

While increased risk aversion may have been a desired outcome in 2009 as legislators and policymakers considered the then-ongoing financial crisis, S&P Capital IQ’s Global Markets Intelligence (GMI) thinks there is a likelihood that the pendulum is now starting to swing in the opposite direction. Given that year-end 2014 long-term debt levels approximated $2.2 trillion, selling debt to get back to the average ratio would yield approximately $1.7 trillion (debt-equity) or $1.4 trillion (debt-market cap).

Click here to view the full report.

Is Suffering Shareholder Return The True Cost of Dodd-Frank?