The stock-market tumble late last year could punish earnings at companies such as Verizon Communications VZ -1.17% Inc. and AT&T Inc. T 0.20% because of how they account for fluctuations in their pension plans.
These companies and others count gains and losses in their pensions and retiree-benefit plans in the same year that they occur, as opposed to spreading them out over a number of years. They were on track for much of 2018 to get an earnings boost until markets swooned in the fourth quarter.
Now, they may report pension losses that will weigh on their bottom lines, or pension gains will be far lower than would have been expected earlier in the year. In fact, many other companies with defined-benefit plans could see their earnings in 2019 and beyond hit by the markets’ stumbles, pension analysts say, though the effect will be more gradual and harder to notice.
“For many, it could serve as a bit of an overhang,” said Royce Kosoff, a managing director at consulting firm Willis Towers Watson.
One company already feeling the impact: Ford Motor Co. The auto maker’s fourth-quarter earnings, announced Wednesday, included an $877 million pretax loss from a pension adjustment. The loss was due to “adverse financial market conditions that occurred late in the year,” Chief Financial Officer Bob Shanks said on Ford’s conference call. The company didn’t provide further comment.
Ford uses the same pension-accounting method as Verizon, AT&T and dozens of others: a mark-to-market approach that records changes more immediately than most companies which still “smooth” their plans’ results into earnings over a period of years. That can make companies’ earnings more volatile, but it is simpler and more transparent for investors.
Until last fall, these companies stood to record pension gains for 2018. The S&P 500 was up 9% for the year through September, helping to raise the value of pension plans’ assets. Interest rates had risen, thus reducing the current value of the plans’ future pension payments to retirees. Those twin developments make a pension plan healthier and better-funded, and those improvements can benefit a company’s earnings. Indeed, both Verizon and AT&T recorded pension gains earlier in 2018—$454 million and $2.7 billion, respectively, for the first nine months of the year—when special circumstances prompted them to make additional pension adjustments to earnings beyond the annual fourth-quarter move.
But while interest rates ended the fourth quarter about where they began, the stock market got crushed. The S&P 500 plunged 14% during the quarter, dragging the index to a 6% loss for 2018. Other asset classes lost ground also.
That could erase pension gains or cause pension losses at Verizon and AT&T when the companies report earnings—Verizon on Tuesday and AT&T on Wednesday. AT&T said in its annual report last year that because it makes yearly mark-to-market adjustments, any market declines “will have a negative effect on our operating results.” Verizon and AT&T declined to comment.