Eric: GE is often taken as a good measure of the overall market. See the excerpt below from Barron's Oct 11 Abeleson: Quoted as:
We should warn you, right here, that he suffers from an incurable malady
known as compulsive footnote fetish. He's an inveterate reader of the arcana
in financial documents. Let's indulge him, then, and study footnote 5 in GE's
last two annuals.
These come under the plain but pregnant heading of "Pension Benefits." (In
common with a number of corporations, GE's pension plan is awash with
funds, so much so that the company hasn't had to make a contribution to it
since 1987.)
Now, if you will, fix your gaze on a table in the footnote that bears the
legend "Pension plan income" in the 1997 annual and "Effect on operations"
in the 1998 version. The bottom line of this table shows "total pension plan
income" -- which is the amount, after all obligations and contingencies have
been provided for, the company took into the year's reported income.
In 1997, pension income chipped in $331 million of GE's total earnings of
$8.2 billion. In 1998, pension income accounted for $1.01 billion of the
company's total earnings of $9.3 billion.
Okay, let's suppose that there was no contribution to earnings in either year
(these are not, in any case, actual cash additions). Minus the noncash
contributions from the pension plans, GE's '97 net was $7.9 billion; its '98
net amounted to $8.3 billion.
On that basis, the rise in earnings last year was roughly $400 million, or
about 5.1%. And 5.1%, while respectable, is a good cut below the 13% the
company triumphantly reported.
GE's shares, as we observed, are selling at some 40 times last year's
earnings. Which is undeniably rich, but not unduly outrageous in this
euphoric market, given the company's many admirable qualities, not least of
which has been its ability to deliver 13% growth in earnings.
But that's the point: What kind of a multiple, our friend muses, would GE get
for earnings growth of 5%, as it would have had to report last year, except
for the help from pension income?
If you're generous and use the going multiple on the Dow of 25, the stock
would be selling at around $70 a share, and its total market value would
weigh in at $230 billion.
In other words, by this reckoning, the $685 million more in pension-plan
income GE took into earnings last year than it did in 1997 added a tidy
$179 billion to its market capitalization. Man, that's leveraging to a
fare-thee-well!
We think it's a shame so few people seem to have noticed this remarkable
addition to shareholder value. GE's bulking up earnings via its pension plan,
incidentally, is strictly according to the accounting rules.
But the investment implications are not especially favorable, holds our
critical friend. However legitimate or even mandated the contribution of
pension income to profits, investors can be finicky on occasion about the
value they place on earnings that aren't quite the right stuff -- that can't, for
instance, be used to buy favors for the Christmas party or pay dividends.
The substantial enhancement to earnings of pension-plan income, especially
when it turns a modest improvement into a brisk one as it did last year, in his
view makes GE's stock at least 50% overpriced. We should mention that he
most often errs on the conservative side.
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