Pension liabilities to hit earnings of US blue-chips

US blue-chip companies face a hit to earnings from greater pension contributions, with charges related to rising liabilities pushing groups such as Verizon and US Steel into losses during the fourth quarter.

The funding gap for pension plans of S&P 500 companies almost doubled in 2011, analysts say, to around $450bn, as bond yields dropped, causing the size of future liabilities to grow. Stock market performance has also failed to keep up with rising liabilities.

“In addition to higher contributions this year, it looks like pension funding may become more of an ongoing drain on cash than it has been in the past,” said David Zion, head of accounting research for Credit Suisse. He estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011.

The bank has identified seven companies where pension contributions are estimated to be more than half of average annual cash flow from operations over the past five years: AK Steel, Goodyear Tire, Weyerhaeuser, Boeing, Northrop Grumman, Lockheed Martin and US Steel.

In the current earnings season, four companies in the Dow Jones Industrial Average have said that pension contributions will be at least triple those made in 2011, with large industrial companies that have a history of generous benefits and shrinking workforces particularly affected.

Boeing’s workforce, for example, has shrunk from around 238,000 in 1998 to under 162,000. The aerospace company has an almost fully funded pension plan, but will make a $1.5bn contribution this year, as a matter of prudence, after not adding cash to the plan for two years. Pension expense will eat into 2012 earnings by around $2.21 per share, bringing expected profits down by a third.

Last month Verizon said that its 2012 cash contribution will be an all-time high of $1.3bn. Alcoa expects to make a record cash contribution of $650m in 2012. Its 2011 contribution of almost $1bn was higher, but the aluminium manufacturer provided $600m of that total in the company’s own stock. Honeywell expects to contribute up to $1bn this year, following a $1.65bn contribution in 2011.

Some argue pension underfunding and the requirement to increase contributions are a temporary result of artificially low rates. “Any time you evaluate a long-term obligation like a pension with a snapshot point in time you will get a skewed and very misleading picture – either positively or negatively,” said James Klein, president of the American Benefits Council, which represents corporate plan sponsors.

But others say greater transparency and focus on corporate pensions is long overdue.

“If you go back a few years, most US large-caps did not spend much time discussing pension costs in earnings releases,” said Jonathan Barry, a partner in the retirement risk practice at Mercer, “I think investors and the market in general are now more attuned to deficits when assessing a company’s financials.”

Additional reporting by Hal Weitzman