Fitch Ratings just stripped the U.S.' pristine AAA credit rating. Luckily there are still two U.S. S&P 500 companies left with perfect AAA credit ratings — a key asset with interest rates on the rise.
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Just two companies in the S&P 500, Johnson & Johnson (JNJ) and Microsoft (MSFT), maintain their pristine AAA credit ratings from S&P, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. This is a startling decline in the number of AAA companies from years past.
And debt is starting to matter to investors. It's not free anymore. The Federal Reserve hiked rates again this year, the bank's 11th hike since 2022, says Bankrate.com. Shares of the 10 S&P 500 companies with the highest credit ratings are up more than 23.3% this year, well above the 15.4% rise of the 10 companies with the lowest credit ratings.
"The U.S. credit rating downgrade should not have been a surprise for investors that have been following Fitch's comments, but the timing surely caught everyone off guard," said Edward Moya at Oanda.
Where Did All The AAA Companies Go?
If it seems like there used to be more AAA S&P 500 companies, you're right, there were.
More than 60 U.S. companies carried the coveted AAA credit rating from S&P Global Market Intelligence in 1980. And that dropped to just six in 2008. Since then, ExxonMobil (XOM), General Electric (GE), drugmaker Pfizer (PFE) and Automatic Data Processing (ADP) have all been downgraded.
Even the U.S. government lost its AAA rating in April 2011 from S&P. That's the last time the government struggled to raise the debt ceiling. It was since restored by S&P.
Cheap debt made the AAA rating look outdated at the time. By borrowing, companies could jack up their return on equity and impress investors at nearly no cost. Companies didn't think the advantage of the AAA rating was worth giving up the financial boost by adding debt.
But the days of cheap debt are fast reversing. Rates on debt are rising fast, especially for companies with lower credit ratings. Dish Network (DISH), the company with the lowest credit rating in the S&P 500 (CCC+), borrowed $2 million in late 2014 for just 5.875%, says Finra's Trace. That's extraordinarily cheap debt for a company with such a low rating. But now, that debt is trading for a yield of a whopping 19.99%. Unfortunately for Dish, the debt comes due in November 2024.
S&P 500's Top Rated Companies
Johnson & Johnson may be facing its talc lawsuits, but in the eyes of credit ratings agencies, it's still AAA rock solid.
J&J continues to hold its AAA rating, the only company in the stable health care sector to do so. Shares are off nearly 3.4% this year. And yet, it's still a cash flow powerhouse. Despite its legal issues, the company's adjusted profit per share is seen rising roughly 5% to $10.75 in 2023. In fact, the company's profit is expected to rise every year from 2023 through 2027.
A more emblematic example of a AAA-rated company is Microsoft. It's one of just a handful of big-cap tech stocks largely driving the S&P 500 higher this year. Shares are up 38%, creating more than half-a-trillion dollars in market value — just this year. And Microsoft is reaping the rewards of treating debt with respect. The yield on the $750 million of debt it raised in 2009 is down to just 4.3%, Finra says. That's off the 5.2% coupon it initially paid.
Who knows what the Fed does next. "The Fed has caused a steep slow down and an earnings recession," said Robert Maltbie of Singular Research.
Debt didn't matter when it was cheap. But now that borrowing matters, investors are paying attention.
Highest Rated S&P 500 Companies
Firms with highest credit ratings
| Company | Ticker | Credit Rating | YTD stock % ch. | Sector |
|---|
| Johnson & Johnson | (JNJ) | AAA | -3.4% | Health Care |
| Microsoft | (MSFT) | AAA | 37.9% | Information Technology |
| Alphabet | (GOOGL) | AA+ | 46.8% | Communication Services |
| Apple | (AAPL) | AA+ | 48.8% | Information Technology |
| Amazon.com | (AMZN) | AA | 53.5% | Consumer Discretionary |
| Berkshire Hathaway | (BRKA) | AA | 13.9% | Financials |
| Walmart | (WMT) | AA | 12.2% | Consumer Staples |
| Abbott Laboratories | (ABT) | AA- | -0.4% | Health Care |
| Accenture | (ACN) | AA- | 20.2% | Information Technology |
| Automatic Data Processing | (ADP) | AA- | 3.3% | Industrials |
Sources: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
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FAQs
Just two companies in the S&P 500, Johnson & Johnson (JNJ) and Microsoft (MSFT), maintain their pristine AAA credit ratings from S&P, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. This is a startling decline in the number of AAA companies from years past.
What are the two AAA rated companies? ›
Currently there are only two companies in the United States with an AAA credit rating: Microsoft and Johnson & Johnson.
Did the US lose its AAA credit rating? ›
As of Aug. 1, the U.S. Treasury owed $32.6 trillion, both to bondholders and other parts of the federal government. That's part of the reason that Fitch cut the U.S. government's long-term creditworthiness by one notch, from AAA – its highest rating – to AA+.
What happens if US credit rating is downgraded? ›
Financial markets may experience short-term volatility as a result of the downgrade. Bonds issued by the US Treasury remain among the safest investments despite the downgrade and Treasury yields may rise as a result.
How many times has the U.S. debt been downgraded? ›
On August 1, 2023, Fitch Ratings announced its decision to downgrade the US long-term credit ratings to AA+ from AAA, but maintained the country credit ceiling at AAA (meaning other borrowers in the US can still receive AAA ratings).
Which banks are rated AAA? ›
| Global Top 100 |
|---|
| Rank | Name | S&P Rating |
|---|
| 1 | KfW | AAA |
| 2 | Zuercher Kantonalbank | AAA |
| 3 | BNG Bank | AAA |
35 more rowsNov 10, 2023
It also reflects elevated risk that the company's growing appetite for M&A will result in average leverage sustained above our threshold of 1x for the 'AAA' rating, given the limited capacity following the acquisition and potential for further significant debt-financed M&A, as well as residual uncertainties around the ...
Why did us lose AAA rating? ›
In response to the 2023 United States debt-ceiling crisis, Fitch placed its AAA rating on a negative watch on May 24, 2023, warning that "risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the government could begin to miss payments on some of its obligations." ...
Do any companies have AAA credit rating? ›
Just two companies in the S&P 500, Johnson & Johnson JNJ and Microsoft MSFT, maintain their AAA credit ratings from S&P, per an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Is AAA rating better than AA? ›
'AAA' rated entities and instruments demonstrate exceptional credit quality and lowest expectation of default risk. 'AA' rated entities and instruments demonstrate very high credit quality with a very low default risk. 'A' rated entities and instruments demonstrate high credit quality with a low default risk.
While it lowered its ratings to negative outlook from "stable", indicating a downgrade is possible over the medium term, Fitch affirmed China's issuer default rating at 'A+', its third-highest category. S&P, the other major global rating agency, also rates China A+, the equivalent of Moody's current A1 rating.
When was the last time US debt was downgraded? ›
The move stirred up memories of the last downgrade of the U.S. government's credit rating from Standard & Poor's (S&P) back in 2011 (note that rating agency Moody's still has the U.S. at Aaa, while S&P remains at AA+. As shown in Figure 1, the stock market sold off sharply in August 2011 on the S&P move.
Why did US credit rating get downgraded? ›
In a statement, Fitch cited three reasons for downgrading the US rating: concerns the US economy is going to deteriorate over the next three years; a high national debt; and repeated political standoffs over managing the country's finances (specifically, brinksmanship over the country's self-imposed debt limit, the cap ...
Who owns the majority of the U.S. debt? ›
The largest holder of U.S. debt is the U.S government. Which agencies own the most Treasury notes, bills, and bonds? Social Security, by a long shot. The U.S. Treasury publishes this information in its monthly Treasury statement.
What country has the highest credit rating? ›
Economies with the highest credit rating at S&P Global Ratings, Fitch and Moody's Investors Service include Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia. Canada is rated AAA by two of the ratings companies.
Can the US ever get out of debt? ›
Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).
What is the highest rating issued by Moody's is AAA? ›
Aaa Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
Which rating is better AA or AAA? ›
S&P ratings are issued to long-term issuers of credit and insurance companies on a letter-based scale. The first rating is AAA, while the second highest is AA. Anything that falls in the A class is considered high quality, and the debt issuer has a strong likelihood of meeting its financial obligations.
What is AAA insurance AM Best rating? ›
Is Aaa rating better than AA? ›
'AAA' rated entities and instruments demonstrate exceptional credit quality and lowest expectation of default risk. 'AA' rated entities and instruments demonstrate very high credit quality with a very low default risk. 'A' rated entities and instruments demonstrate high credit quality with a low default risk.
