Q3 of 2018 was S&P 500’s best quarter since 2013 – signalling good times for corporate America. But, worryingly, “tangible” net-worth of companies has been falling – a commonality between the 2001 and 2008 recessions. The tangible book value of the S&P 500 companies had been gradually shooting up post-2008 and touched its peak in 2014 before paring all the gains made post-recession.
Several factors, like a low interest rate environment that has further been a factor in the doubling of corporations’ debt load (which subtracts from book value), have been responsible but the result is that 38% of S&P 500 companies now have negative “tangible equity”; and the number is rapidly growing. Leading the pack is AT&T Inc. which has a negative tangible book value of $129 billion. Even General Electric, for that matter, has a negative tangible book value of $47 billion.
One may argue that such figures are imminent as economies become increasingly service-based i.e. as brands’ and patents’ importance grows further. But of the $1.7 trillion spread between total net-worth and tangible net-worth $750 billion comes from goodwill growth while only $70 billion comes from intangible assets. Assuming, amidst increasing acquisitions and consolidations, a major chunk of goodwill indicates overvaluation, the market could be further overvalued (currently trading at 10.6 times the tangible net-worth while the 20-year average is 6.4 times).
Combine this with soaring debt-levels and bleak sentiment regarding 2020 amidst rising volatility, protectionism and brakes on QE – we might see a massive downturn if a sort of recessionary phase comes up causing losses in incalculable multiples; because, in times of distress, people like to hold on to something “tangible” rather than something “intangible”.
Book Value = Net Worth
Book Value = Assets – Liabilities
Tangible Book Value = Tangible Assets - Liabilites