Earnings Estimates Are Likely to Come Down
While third-quarter profits came in slightly lower than expected, the attention has now shifted to 2009 and the impact of the economic slowdown.
By Howard Silverblatt From Standard & Poor’s Equity Research
Though fourth-quarter earnings estimates still portray a rosy picture, they are likely to be cut significantly by the extreme point of November.
After all, this is the time of the year while the next year begins to become a matter of fact. The fourth quarter is infamous for writedowns and Standard & Poor’s Index Services, which operates independently of S&P Equity Research, believes impairment charges will own being expressive. Additionally, layoffs, both stream and planned, are appropriate more common, along with their associated costs and commencing short-term cash outflows (severance).
All-in-all, estimates are getting further difficult and in greater numbers complex to make, with deviating assumptions leading to widely varying predictions.
With 77% of third-quarter earnings instead of companies in the S&P 500 reported through Oct. 31, it appears as if the quarter, which was expected to effectuate an earnings gain of 14.2%, should come in at -13.4%. Financials continue to be the problem (the sector should easily post its fourth consecutive quarter of negative earnings), and consumer discretionary helped to bring the overall numbers down. Specifically, recent layoff announcements supply the “I could be nearest” fear, leading most to believe that consumers will pull back even further, and though a lump of coal may not be the festival benefaction of choice, the purchases this year be disposed be more selective and closer to the “need” than “want” category.
DIVIDEND INCREASES SLOW, CUTS ON THE RISE
We now expect a 2008 dividend payment for the S&P 500 of $28.05 vs. our anterior estimate of $28.85.
In 2007, the payment was $27.73. The 1.2% expected 2008 increase is the lowest growth rate since 2001 when payments were down 3.3%.
We don’privately expect the full impact of the annual dividend reductions to be felt until 2009. We do see a 10% decline in the fourth-quarter 2008 payment compared with the fourth-quarter 2007 outlay, the worst quarterly change since 1958. Sixteen financial dividend cuts in September and October lowered dividend payments by $14.6 billion.
We will provide our 2009 dividend appraise later in the fourth be stationed. Given the current economic climate, 2009 dividend increases are expected to slow.
In October, there were 10 increases and 12 declines. At least in late relation, there has been no month (before October) where the negative announcements outnumber the positive ones; the prior worst month was +6 and that was in September. Worse has been the dollar squandering, with $8.5 billion in reductions, and $0.5 billion in increases for October; year-to-date, there have been $33.2 billion in reductions, which easily outweighs the $18.0 billion in increases. Financials accounted for 92.7% of the dollar mischief.
Payers’ stocks outperformed those of non-payers in quest of all periods: the month posted -20.9% return for payers vs. a -21.9% loss for non-payers, year-to-date (-34.7% vs. -38.8%), and the 12-month period (-38.6% vs. -44.9%). While none of the returns are good, dividend payers have clearly performed better. Their long-term return, based on an annual portfolio of payers vs. non-payers is +2.4% (basically your permit) per year compounded over non-payers, or $133,652 on an incipient $10,000 investment made in 1979.
COMPANY PENSIONS EXPECTED TO TAKE A HIT
Last year, S&P 500 companies were able to brag that their pension funds were over-funded by $63 billion, a value not seen since 1995. It’session now 10 months later, and at this point, it looks like they are on the way to reporting the largest under-funding in history.
Going into the year, the companies estimated an 8% return on their pension property for 2008, and used those numbers in their reporting, allocations, and planned contributions. They had 61% of their money in righteousness, 32% in fixed income, 2% in absolute estate, and 5% in the catch-all other leading predicate. They also had 15% in foreign markets, that significantly helped them obtain that over-funding status in conclusion year.
While someone efficacy be achieving 8%, the reality is that any pension fund conductor that is even breaking so much as this year is in the greatest degree likely demanding a bonus. The U.S. market is from the top to the bottom of more than 33%, and that’s good compared to the emerging markets, which have fallen more than 50% this year alone. That means the 61% allocation to theoretical may not be doing that well. Interest rates are down, otherwise than that the key to the 32% in fixed income is the investment choices. When you adapt everything at the current market returns, or divisible by two assuming a nice fourth-quarter fly back, you arrive at a number that is worse than the $219 billion in under-funding reported in 2002, and that’s after starting from the positive 2007 $63 billion position.
Since 2002, the accounting requirements have changed, and companies since have to put their funding status on the equipoise sheet. Since effects still equal liabilities, equity will have to be marked down. The under-funding will also have to be addressed through large unplanned cash infusions, that resoluteness come at a time at the time liquidity is stingy.
Overall, we expect few companies to remain over-funded and compass the payments will add greater degree of pressure steady companies to cut short the already dwindling amount to of defined pension programs out there.
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