The almost 4% recent decline in the S&P 500 from the close of November 5 (recent peak) thru today could not come at a worse time for firms with underfunded pension plans. The median assumed long-term investment performance, for most firms, is now below the 8% median for the year, and noticeably below for the past 5 and 10 year periods. While the median discount rate assumption, of 5.9%, has seen some minor relief, it is still providing pressure, given the fall in yields during 2010. The discount rate assumption compares with a current 2.77% 10 year treasury rate while annuities hover around 3.8%. Firms may also elect to partially close out its plan thru annuitizing a segment of its population.
Archive for November, 2010
Recent Stock Drop to Impact Pension Contributions, Cash Flow, Financial Structure and Operating Decisions
November 30th, 2010
How Country Risk Affects Fair Valuation of Equity Securities
November 29th, 2010The past few years out-sized swings in the prices of financial securities have been caused, no doubt, by changes to credit and risk, which form the basis of the cost of equity capital. Yet, despite security analyst and investors continued fixation on the quarter up the road’s reported earnings, it is evident it is the ability to create value ( through enhancement of free cash flows) and reduction in cost of capital that should stand front and center for investors looking to enhance their portfolio returns.
» Read more: How Country Risk Affects Fair Valuation of Equity Securities
Your Portfolio: “… at least, do no harm.”
November 22nd, 2010“… to help, or at least do no harm.”
Hippocrates
Investors, without recognizing the implications of their decisions, often sway from the fundamental concept of doing their portfolio no harm.
Non-US Stocks Appear to Offer Somewhat Greater Value
November 19th, 2010What began as a study on sovereign risk (an important element in CT Capital LLC’s cost of capital model) turned in some interesting offshoots. The study was also undertaken because the CT Capital, equity portfolio has a larger than normal (14%) exposure to ADRs and we wanted to uncover the reason(s).
» Read more: Non-US Stocks Appear to Offer Somewhat Greater Value
Keep Credit Trends a Free Site
November 17th, 2010Credit Trends has become a very popular site. However, we do not accept advertising and there are expenses associated with it’s maintenance
We will decide whether to keep it an open site in the next few weeks
You can help by buying the book to your right-I need just 1% of the daily readers of this service.
If we go to a full subscription site, annual fees will begin at $295 annually. While I am sure it will be quite profitable if we go this route, it is not what we prefer. But its up do you. I believe, as I am told many times, there is no site like Credit Trends.
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November 17th, 2010If you are disappointed with Wall Street research, you have every right to be.
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Readers will come to understand stock movements they currently have trouble explaining, since significant movements are almost always led by changes in cost of equity capital and the perceived risk to the credit (cash flows). The text explains why entities having a low cash-defined ROIC resulting in small amounts of distributable cash flows are accorded lower valuations despite having higher rates of growth in revenues and/or earnings.
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Honeywell (HON) Pension Accounting
November 17th, 2010(The comment below does not constitute an opinion as to the valuation of Honeywell (HON) common stock—only its pension accounting.)
However, for investors who make buy/sell decisions on the basis of P/Es or other accounting conventions, the news out of Honeywell was certainly good. For 2011, the firm, based on information released yesterday, expects to accrue a $200MM expense on its P&L, despite an actual cash contribution into its pension plans of $1 billion. Its shift to mark-to-market helps during periods of rising asset values.
Honeywell’s (HON) Pension Announcement a Smokescreen—It Does Impact the Firm and its Valuation
November 16th, 2010Honeywell (HON) announced a change to its method of pension accounting whereby it will reflect changes in market value each year instead of the smoothing them, which helped show a healthier plan when market values were declining for Honeywell. Now that market values are rising, Honeywell is desirous of changing its methodology. The company then revised its earlier results in conformity with the changes.
Taxes—An Important Cash Flow Metric
November 15th, 2010Taxes are an important focal point of securities analysis due to its scope, size, as well as its direct and measurable impact on cash flows. Taxes impair current and prospective operating cash flows because it is imposed on residual profits, after a series of adjustments and credits; the only question is the degree. Investment projects are always considered on an after-tax basis, considering both the income tax effect and the financing effect. Special tax incentives may also impact the hurdle rate and project return on invested capital (ROIC).
Because taxes are not imposed on its income an enterprise pays as interest to creditors, the income tax system creates a bias in favor of debt financing. This bias often results in the overuse of leverage by some firms, and a greater probability of bankruptcy.
Kraft’s (KFT) Dividend Hurting Valuation
November 10th, 2010When Kraft (KFT) released its balance sheet and income statement when reporting its fiscal third quarter last Thursday, it did so without a corresponding statement of cash flows. In its place, including during the ensuing conference call, Chairman Rosenfeld redundantly pointed to operating earnings without a single mention of cash flow, unusual given the heavy reliance by investors on the dividend. Operating earnings do not represent distributable cash flows, among other reasons, it is reported prior to interest expense, which is hefty for Kraft.
Pensions-What UPS’s $2 billon Bond Sale Represents
November 9th, 2010UPS sold $2 billion in long-term bonds to fund its pensions yesterday, raising its total debt/equity to over 100%.
Although UPS is a solid and consistent generator of both free and operating cash flows, we saw that during the credit crisis of a short couple of years ago, even UPS’s fixed income securities could be impaired.
» Read more: Pensions-What UPS’s $2 billon Bond Sale Represents
Free Cash Flow Growth Led by Strong Cost Cutting and a Tad of Financial Engineering
November 8th, 2010If equity markets represent the flawless leading economic indicator generally believed, investors should be very comfortable nowadays. After all, the S&P 500 is up almost 12% so far this year. Yet, economists remain generally concerned.
Is it not then unreasonable to ask: Are the glorious headlines trumpeting rising free cash flows portending a sustainable and durable continuation of the economic expansion or perhaps the result of severe cost cutting with a dose of imaginative accounting?
» Read more: Free Cash Flow Growth Led by Strong Cost Cutting and a Tad of Financial Engineering
