In a world where financial stability is a highly sought-after trait, credit ratings play a pivotal role in assessing the reliability of entities, be it corporations or governments. Among the various credit ratings, the AAA rating reigns supreme, indicating an "obligator's capacity to meet its financial commitments on the obligation is extremely strong." Yet, as time marches on, the landscape of these pristine AAA ratings has shifted dramatically.
In August 2011, the United States, the behemoth of economies, lost its cherished AAA rating. Standard & Poor's, the arbiter of creditworthiness, downgraded the U.S. long-term credit rating to AA+, with the ballooning federal budget deficit following the Great Recession being the primary catalyst for this change. The seismic shift left many questioning the notion of what is financially invulnerable.
Even stalwart corporations like ExxonMobil, an integrated oil and gas giant, faced the harsh reality of losing its AAA credit rating in 2016. The sudden plunge in crude oil prices from over $100 a barrel to under $30 in 2016 exposed ExxonMobil's soaring debt levels. This shift marked a significant turning point, highlighting the vulnerability of even the most established corporations.
However, the erosion of the AAA rating didn't spare corporate giants such as General Electric, Pfizer, Merck, Coca-Cola, and UPS. These titans of industry, once possessing pristine creditworthiness, have seen their ratings downgraded over the past three decades. The root of this transformation can be traced to the gradual decline in lending rates, which enticed many publicly traded companies to increase their leverage.
Amid this sea of rating downgrades, there are two standout exceptions, remaining steadfast with their AAA credit ratings, indicating a lower risk of default than the U.S. government. These exemplars of financial strength are Johnson & Johnson and Microsoft.
Johnson & Johnson: A Healthcare Colossus
Johnson & Johnson, a healthcare conglomerate, stands as a paragon of financial stability. Despite carrying a substantial debt load of $30.2 billion, Johnson & Johnson's impressive financial fortitude becomes apparent when examining its $17.9 billion in cash reserves. Furthermore, the company has generated a staggering $21.4 billion in operating cash flow over the past 12 months. Projections from Wall Street anticipate this operating cash flow to expand to an estimated $28.7 billion by 2021.
The key to Johnson & Johnson's resiliency lies in its diversified business model. Comprising three distinct segments, each contributes to the company's overall stability. Consumer healthcare products, although a slower-growth sector, provides consistent cash flow and robust pricing power. Medical devices, despite recent challenges, presents an opportunity for long-term growth in a world with an aging population and enhanced access to healthcare. Lastly, the pharmaceutical division boasts high margins and strong pricing power, albeit constrained by patent protection limitations. This three-pronged approach intertwines to form the bedrock of Johnson & Johnson's financial security.
The company's remarkable track record is exemplified by its 57th consecutive annual dividend increase as of April 2019, a feat only matched by a select few. Additionally, Johnson & Johnson boasts 36 consecutive years of adjusted operational earnings growth, underscoring its unwavering financial prowess. Barring a colossal, unprecedented lawsuit, it is improbable that Johnson & Johnson would lose its coveted AAA rating.
Microsoft: The Tech Titan
Another company that has retained its AAA rating is Microsoft, a tech giant with a market capitalization of $1.4 trillion. Despite concerns surrounding a potential downgrade following Microsoft's issuance of nearly $20 billion in debt to acquire LinkedIn in 2016, this prediction never materialized. Currently, Microsoft carries $87.2 billion in debt, offset by $134.2 billion in cash reserves and a robust operating cash flow of $54.1 billion over the past 12 months.
Microsoft's unique strength stems from its ability to excel in both legacy software and next-generation cloud services. Surprisingly, for a company of its size, Microsoft achieved a remarkable 14% year-on-year sales growth during the fiscal second quarter. Legacy products, like Office 365 Commercial, continue to perform admirably, with a 30% constant currency sales growth from the prior year. Simultaneously, Azure cloud services experienced a remarkable 64% growth, excluding currency fluctuations.
The synergy between high-margin cloud revenue and enduring demand for legacy products solidifies Microsoft's financial stability. Unless a revolutionary disruption in computer operating systems or the cloud space emerges, Microsoft's AAA rating appears to be an unshakable testament to its financial robustness.
In summary, while the world has witnessed the gradual decline of AAA credit ratings, Johnson & Johnson and Microsoft remain as the last two standing giants in the corporate realm. Their unwavering financial strength and adaptability in evolving markets affirm their positions as bastions of AAA-rated stability in an ever-changing financial landscape.
