Glenview-based Mead Johnson -- don't touch 'em
Don't buy Cablevision Systems Corp.
Stay away from Moody's Corp. and Dish Network Corp.
Avoid Qwest Communications International Inc. and Mead Johnson Nutrition Co.
Be leery of Pitney Bowes Inc., Delta Air Lines Inc., Morgan Stanley, Coca-Cola Enterprises Inc., and American International Group Inc.
My reason for giving this advice: These companies, in my judgment, have some of the worst balance sheets in the U.S.
The first five companies mentioned above have negative net worth; that is, their liabilities exceed their assets. Among the 727 U.S. companies with a stock-market value of $3 billion or more, only 17 have that unfortunate distinction.
The next five companies have positive net worth (stockholders' equity) but their total debt is at least five times equity, a trait shared by 26 of those 727 companies.
There are compelling reasons to prefer businesses with low debt. A company with cash on hand and no bankers looking over its shoulder can buy troubled competitors or snatch assets that its debt-laden rivals need to shed.
Take oil tankers as an example. Whenever I meet with tanker company executives these days, someone usually predicts that a shakeout will soon hit the industry.
Ready to PounceTankers will be for sale cheap, they say, and they will be the shrewd ones who will pick up ships at bargain prices. Well, if such a shakeout happens, not every company can emerge as the canny victor. I put my money on Overseas Shipholding Group Inc., a New York company with one of the strongest balance sheets in the group.Or look at how JPMorgan Chase Co. used its balance-sheet strength during the financial crisis of 2008. Chief Executive Officer Jamie Dimon was able to take a firm stance in negotiations with the federal government, and won the right to swallow Bear Stearns Cos. at what I consider a bargain price of less than $10 a share.Bear Stearns, by the way, is a company I liked, admired, and did business with. But it got too close to the flame of excessive debt, leaving it inadequate room to maneuver when times got tough.Generally, I consider debt to be too high if it exceeds stockholders' equity. Companies with steady cash flow -- utilities, cable television operators, tobacco and liquor companies -- can safely take on a bit more than that, so long as no game-changing events rock their industry.For portfolios I manage, I generally prefer companies where debt is less than 50 percent of equity.Cablevision, Moody'sHere's my take on 10 debt-laden companies to avoid.Cablevision, based in Bethpage, New York, has posted annual losses in four of the past seven years. Like all cable operators, it faces potential competition from satellite and wireless technologies.Moody's, a bond rating and financial information firm based in New York, has come under heavy criticism for issuing bond ratings that were too uncritical. I think profits could be hurt by lawsuits alleging biased ratings. Rivals such as Standard Poor's, a unit of McGraw-Hill Cos., face similar issues but have stronger balance sheets. Warren Buffett's Berkshire Hathaway Inc. has been cutting its stake in Moody's during the past six months.Dish Network, based in Englewood, Colorado, may struggle to pay back more than $6 billion in bonds between now and 2019. While the stock sells for about $19, corporate net worth is negative $3.09.Buggy WhipsQwest, with headquarters in Denver, offers phone and Internet service. It has a rich dividend yield of more than 7 percent, though I believe a dividend cut may occur. Also, the 2009 dividend will be taxed as ordinary income, the company said.Mead Johnson, a Glenview-based maker of infant formula, was spun off by Bristol-Myers Squibb Co. last year. Propped up by occasional takeover rumors, the stock trades for a pricey 22 times earnings.We all know the postage meters manufactured by Pitney Bowes of Stamford, Connecticut. But postage meters are a buggy-whip business in the age of e-mail. No wonder the company reduced the generosity of its pension plan in November and announced job reductions in December.Delta Air Lines, based in Atlanta, hit a 52-week high last week, partly on hopes for lower fuel prices. I believe those hopes won't materialize and that Delta's debt load of about 20 times equity is excessive.High DebtNew York-based Morgan Stanley is the world's biggest brokerage house, now disguised as a commercial bank. Its debt of 14 times equity makes me nervous, even though it is trying to emphasize steady businesses like asset management.Coca-Cola Enterprises, which bottles Coke's soft drinks, has debt equal to almost 12 times equity. The Atlanta bottler has made little earnings progress since 2003.American International Group, a New York-based insurer that operates worldwide, lost so much money on derivatives that it required a costly government bailout. The government now owns 81 percent of the company, and it will take so long to repay Uncle Sam that profits for regular shareholders will probably be diluted to near-oblivion.Disclosure note: I own shares of Overseas Shipholding Group personally and for clients. I have no long or short positions in the other stocks discussed in this week's column.John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.