The Truth Behind Second-Quarter 2013 Corporate Earnings
The second-quarter earnings reporting season is underway, and mainstream stock advisors have high hopes. But what we are seeing is “more of the same” of what we saw in last quarter’s S&P 500 company corporate earnings: revenues are lower; corporate earnings are mediocre, and share buyback programs are boosting per-share income.
Take E. I. du Pont de Nemours and Company (NYSE/DD), a constituent of both the S&P 500 and the Dow Jones Industrial Average, as an example. The chemical giant reported corporate earnings of $1.03 billion, or $1.11 per share, for the second quarter. These earnings were 12% lower than the same period one year ago.
Caterpillar Inc. (NYSE/CAT), the mining and construction company that is also a component of both the Dow Jones Industrial Average and the S&P 500, reported a decline of 43.5% in its second-quarter corporate earnings compared to the same period one year earlier; Caterpillar slashed its outlook for the entire 2013 year. The company’s profit fell to $960 million in the second quarter from $1.7 billion a year earlier. On a per-share basis, the company’s corporate earnings declined from $2.54 to $1.45. (Source: Reuters, July 24, 2013.)
This April, Caterpillar announced its first share buyback in more than four years. The company has or will purchase $1.0 billion worth of its own shares at market prices. (Source: Associated Press, April 25, 2013.) And, of course, this will boost per-share earnings.
Halliburton Company (NYSE/HAL) is one company that reported corporate earnings slightly above estimates at $0.73 per share compared to $0.72 expected. But the company’s profit actually went down for the second quarter to $679 million compared to $737 million from a year ago—a decline of almost eight percent.
So how did Halliburton beat the Street with its per-share profit? In the second quarter, Halliburton purchased $1.0 billion worth of its own shares; hence it reduced the number of shares in circulation, pushing up per-share earnings even though actual profits were lower. Halliburton recently announced it raised its share buyback authorization to $5.0 billion.
Pfizer Inc. (NYSE/PFE), the major drug maker included in the S&P 500, has announced another share repurchase program valued at $10.0 billion—the fourth increase in its share buyback program in two and a half years, bringing its total share buybacks to $39.0 billion.
This is not what you call real corporate earnings growth, dear reader. S&P 500 companies are barely meeting already-lowered analyst corporate earnings expectations in the second quarter. Hence, these companies are resorting to stock buybacks to prop up per-share profits.
Companies cannot continue the practice of buying their own shares to increase per-share corporate earnings for the simple reason that sooner or late, they will run out of cash to make the stock buybacks. You really have to look at this from the outside in, as they say. If big public companies can’t achieve real profit growth, and they resort to share buyback programs to boost per-share profits as a result, how far away can the end really be for the stock market rally?