Drop in corporate earnings may be near end Analysts say profits will rise by late '91

October 08, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- Yesterday, it was Westinghouse; last week, American Express, USAir, Sun Co. and Oryx Energy Co. All announced huge write-offs or losses, underscoring the financial stress of a difficult time.

And more write-offs are expected, along with miserable results. The monthly survey of Wall Street analysts by the Institutional Broker's Estimate System (IBES) concludes that profits for the companies in the benchmark Standard & Poor's 500 are expected to fall 4 percent this year.

The dollar value of one-time charges, reckons Abby Joseph Cohen, co-head of investment strategy at Goldman Sachs, exceeded 20 percent of the collective operating earnings of the S&P during the second quarter and might be just as bad this quarter.

But rather than reflecting a worsening trend, the harsh third-quarter announcements flowing from corporate headquarters may be a final cathartic scream.

"Companies," said Arnold Kaufman, a vice president at Standard & Poor's Corp., "are cleaning the slate."

Added Ms. Cohen, "We are at the bottom, or very close to it."

Economists at both Standard & Poor's and its functional equivalent, Moody's Investors Service, believe the recent decline in corporate profits either bottomed in the second quarter or are bottoming now.

By the end of the year, profits should have begun to rise on a consistent quarterly basis. In 1992, the hundreds of analysts whose numbers are used in the IBES compilation collectively believe Standard & Poor's 500 profits should jump 28.5 percent.

jTC A hopeful sign for enhanced profitability emerged last month when dividends for the S&P collectively rose for the first time since October 1989. "Dividends," Mr. Kaufman noted, "follow profits.

September is a notoriously slow month for dividend increases, and therefore the numbers were too sparse to demonstrate a truly decisive turn. Nevertheless, Mr. Kaufman labelled the shift after almost two years of steady declines as encouraging: "The recovery, though sluggish, is a recovery. There is improvement," he said.

Among the large companies raising dividends were ConAgra Inc., H. J. Heinz Co., Quaker Oats Co., Transamerica Corp., Union Pacific Corp. and the Upjohn Co.

Several more months of gains are necessary before a trend in rising dividends can be considered firmly established, and that, Mr. Kaufman noted, will not be easy.

The initial beneficiaries of the recovery are manufacturers. Because this segment of the economy is notoriously cyclical, they are reluctant to boost dividends out of fear the recovery could stall.

Moreover, there may be little impetus to do anything quickly. "As companies begin to see better news, they may hold it over until the first quarter of next year, figuring 1991 was pretty crummy anyway," said Goldman's Ms. Cohen.

In the meantime, expect to hear more bad news. Profit margins for the companies included in the Standard & Poor's 500 are approaching the 1959 low of 3.5 percent, Mr. Kaufman noted. That has taken a toll on even healthy companies with strong balance sheets. Despite surging orders for factory goods, for instance, manufacturers have continued to reduce their work forces.

For companies in particularly troubled areas -- for instance, those tied to advertising or construction -- times have been particularly tough. Only a few sectors of the economy, notably health care, have been able to add employees and boost profits.

Aggregate numbers for how the recession has affected corporate balance sheets won't be available for months. In the meantime, the impact is particularly notable on the margin, where the difficult climate has undermined companies that entered the downturn with weak balance sheets.

Moody's reckons defaults by companies with speculative-grade credit ratings will hit levels not seen since the Great Depression. About 11.6 percent of the debt rated less than investment grade will default this year, up from 3.4 percent in 1988 and 0.7 percent a decade ago.

That, too, should moderate next year, said John Lonski, senior economist at Moody's, as long as the current efforts of companies to become more efficient doesn't go too far.

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