Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
October 04, 1999 01:00 AM

PUMPED UP: ANALYSTS DISCOUNT THOSE SURPLUS-ADDED EARNINGS; PENSION INCOME IS VIEWED AS UNSUSTAINABLE

Ricki Fulman
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Companies that pump up corporate earnings by including pension income with operating income as part of earnings aren't fooling the pros who follow the stocks.

    Analysts interviewed by Pensions & Investments said they already discount pension income when analyzing how well a company is performing. That's in large part because most analysts consider such earnings unsustainable or low quality.

    Among those using their pension surpluses to paint prettier pictures: The Boeing Co., Seattle; Lucent Technologies Inc., Murray Hill, N.J.; and Northrop Grumman Corp., Los Angeles.

    "Many analysts don't consider pension surpluses when looking at a company's earnings," said Syl Marquardt, research director, John Hancock Funds, Boston, which owned 854,000 shares of Lucent as of June 30, according to First Call Share Watch, Boston (formerly CDA/Spectrum).

    Lucent counts 15%

    Around 15% of Lucent's operating income is from its pension surplus, according to a report by Bear Stearns & Co. Inc., New York, which studied the companies in the Standard & Poor's 500 stock index and found that in 1998, 17 firms adjusted operating income by 15% or more above what was reported as operating income by adding in investment income from their pension funds.

    "My view is that including pension surpluses overstates earnings. We look at the quality of earnings. Anything that's non-durable would not have the same value as recurring earnings," said Mr. Marquardt.

    The pension income is actually a temporary benefit, or penalty, depending on whether it's a bull or a bear market, Mr. Marquardt added.

    He also noted some firms are changing the way they report earnings. "They are using an economic value-added approach, reporting cash returns on cash investments. We expect to see more and more of this," predicted Mr. Marquardt. That, in turn, would eliminate the pension surplus reporting.

    Mike Holton, an investment analyst who follows Boeing at T. Rowe Price Associates, Baltimore, said: "When you look at the Boeing earnings, it doesn't matter if they have added in their pension income, because their earnings level has been so low to begin with. Earnings in 1998 were higher than in 1997, because of the pension surplus. But it's not a big number anyway and no one would buy it based on that."

    T. Rowe owned 37 million shares of Boeing as of June 30, according to First Call Share Watch.

    Stock price boost

    Pension income boosted Northrop Grumman's earnings by as much as $3 per share, Mr. Holton said. T. Rowe Price owned 88,000 shares of Northrop as of June 30, according to First Call.

    Joel Litman, director at Holt Value Associates, Chicago, said companies are supposed to include pension income with their earnings under the Financial Accounting Standards Board regulations, but it can be difficult to understand what is truly coming from operations.

    "Companies are supposed to explain what is pension income in their footnotes, but they could include more information. It's not the easiest thing to dig it out."

    His firm calculates cash flow returns on investments so investors can see the true performance of a company. Mr. Litman believes a lot of analysts would like to see a change in the reporting methods.

    Keith Patriquin, a senior analyst at Loomis, Sayles & Co. LP, Boston, said including pension income in operating earnings muddies the waters. "If pension income per share changes earnings considerably, we tend to exclude it. If it's an insignificant amount, we might not. But if it's significant, it should be subtracted and we do."

    Pension income is "very significant at Northrop Grumman," Mr. Patriquin said. "For 1999, we expect the company to report earnings of $6.59 a share. Of that, $3.30 is pension income. If you subtract that, it brings the figure to $3.29 a share. Then we add $2.90 in good-will amortization from Northrop's acquisitions of units of Westinghouse Electric Corp. and Grumman Corp., and it comes to $6.19. That is the number I will look at."

    Loomis owned 165,000 shares of Northrop and 253,000 shares of Boeing as of June 30, according to First Call.

    Mr. Patriquin does the same computations when comparing earnings of competitors such as Boeing. In that case, he said, he subtracts 40 cents a share of pension income from the $1.50 in earnings the company is expected to report for the year, and then adds $1.05 a share for the good-will amortization for acquisitions of Martin Marietta Corp. and Loral Corp., bringing the final earnings number to $2.15.

    Those numbers are understood by most institutional investors, Mr. Patriquin said. They allow investors to assess companies in terms of risk-reward factors. However, he worries investors who use quantitative screens may not look at all the details he does.

    "If a stock's earnings change a lot, some investors might buy or sell the stock based on the change, without considering the quality of the earnings."

    The earnings figures that are reported each quarter are filtered through First Call, which publishes consensus earnings estimates based on an average of what analysts at major retail brokerage firms expect companies to earn.

    These analysts, known as sell-side analysts, view earnings differently from the buy-side analysts who work at money management firms running money for big institutional clients.

    Chuck Hill, director of research at First Call, said sell-side analysts never break out pension income. "They choose to keep it there. The issue has not come up. It's not even on the radar screen. We look at earnings from continuing operations, and go with what a majority of analysts want to do. Maybe it (including pension income) should be discussed more, but we don't set policy. It's set by the analysts we survey."

    Buy-side analysts don't publicize their estimates, so they're not included in the First Call surveys.

    Mr. Patriquin said if a company reports earnings that appear high and the stock then trades up on momentum buying, a lot of investors might not realize why the earnings are so high or what's going on.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    July 29, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit