Corporate pensions have suffered after the S&P 500 posted its first negative total return over any decade and the Federal Reserve cut its benchmark interest rate to a record low in December 2008.
S&P 500 companies' pension funding levels might have dropped $134 billion this year as bets on higher interest rates went awry and the stock market weakened, the analysts said.
The benchmark for U.S. equities is up 1.7% this year while the yield on the two-year Treasury note touched a record low. The S&P 500 posted an average decrease of 0.9% a year from 1999 to 2009, including dividends, the first negative return for a decade since data began in 1927, according to S&P analyst Howard Silverblatt.
Pension costs for S&P 500 companies will increase to $53 billion in 2011 from $40 billion this year, Messrs. Zion and Varshney forecast. As a result, 95 companies could have their earnings cut by at least 5 cents a share next year, assuming a 35% tax rate. Boeing, the world's second-biggest commercial-jet builder, might see a reduction of 12%, or 57 cents a share, from the average analyst estimate, Credit Suisse said.
Other S&P 500 companies where 2011 earnings could fall more than 10% from analyst estimates because of pension obligations, according to Credit Suisse's projections, are Vulcan Materials Co., Marsh & McLennan Cos. Inc., New York Times Co., Northeast Utilities, Honeywell International Inc. and Deere & Co.
“Higher pension costs could be one reason why 2011 earnings estimates may have to come down and we would expect some companies to start taking down their 2011 guidance when they announce third-quarter earnings,” the analysts wrote.
On Sept. 23 Mark Fields, Ford Motor Co. president for the Americas, said that earnings in 2011 won't be hurt by an increase in the company's pension costs,
Ford's cash contribution to its Dearborn, Mich.-based pension plan next year won't change from what the company already had planned, Mr. Fields told reporters following a speech before the Society of Automotive Analysts.
The contribution will be about $1.5 billion next year, the same as in 2010, said John Stoll, a Ford spokesman.
Credit Suisse analyst Christopher Ceraso had forecast Ford's earnings per share could decline 18% next year partly because of increased pension expenses. Mr. Ceraso, who rates Ford “underperform,” predicted the automaker's shares would fall to $11 in the next 12 months.
“We expect our pension expenses for 2011 would increase moderately,” Mr. Fields said during his speech.
“As we look forward to 2011, we continue to see improved performance,” he said.