Archive for Tuesday, February 7, 2012

Corporate profits not what they seem

February 7, 2012

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— Is the great profit engine of corporate America running out of steam?

While other parts of the economy struggled the past two years, large companies managed to rack up higher profits quarter after quarter. Now reality is catching up with big business.

As companies close their books on the final three months of last year, the big ones that make up the Standard & Poor’s 500 stock index appear likely to earn about $230 billion. That would be $12.6 billion more than a year earlier.

But the increase, 5.8 percent, is less than half the speed at which quarterly profits grew the first nine months of 2011. In the average quarter since the beginning of 2010, earnings have grown five times as fast.

Analysts expect profit growth to accelerate later this year. But so far, almost all the growth comes from two companies, one of them among America’s most favorite, the other among its most hated — Apple and the bailed-out insurance company AIG.

Take away those two companies and profits for the remaining 498 are expected to grow a measly 1.1 percent, according to FactSet, a provider of financial data.

The immediate future looks about the same. For this quarter, which ends March 31, profits for the S&P; 500 are expected to be up about 1 percent from the year before. And that’s with Apple and AIG thrown in.

“Were the economy to sustain a shock, this makes us more vulnerable,” says Barry Knapp, chief U.S. stock strategist at Barclays Capital.

Comments

Richard Heckler 3 years, 6 months ago

How Life Insurance Morphed Into a Corporate Finance Tool

By ELLEN E. SCHULTZ and THEO FRANCIS Staff Reporters of THE WALL STREET JOURNAL

After the Sept. 11 terror attacks, some of the first life-insurance payouts went not to the victims' families, but to their employers.

Unknown to most people outside the insurance world, corporations now are among the largest beneficiaries of life insurance, collecting on policies they purchased on the lives of employees.

Life insurance has long been championed as a safety net for widows and orphans. But over the past decade and a half, hundreds of American companies have taken out life insurance on millions of their employees, harvesting tax advantages that fatten their coffers.

In the industry, companies' coverage of the lives of low-level workers is called "janitors insurance." It has two notable features: Most of the workers never consented to the coverage, and it remains in force even if they've long since left the company.

Recently, employers have been taking out larger policies on the lives of managers, usually with their consent. Like janitors insurance, these policies make the employer, not the family, the beneficiary.

Dow Chemical Co. Wall Street banks AT&T Wal-Mart Nestle's AMWAY GM Bank of America New York Times

to name a few...

Among the few traces of the Sept. 11 payouts was Hartford Life Insurance Co.'s fleeting reference, in a quarterly regulatory filing, to an after-tax charge of $2 million related to the Sept. 11 attacks. Hartford confirms that the payout itself was greater than the net charge and that it went to employers.

http://online.wsj.com/public/resources/documents/dec_30_one.htm

PS. Best check your policies if the employer is paying...

jhawkinsf 3 years, 6 months ago

Merrill - Wasn't it you who advocated for free speech limits the other day. Good thing no one advocated limiting your free speech, huh?

jafs 3 years, 6 months ago

Yes it is.

Read Article 1, Section 8 of the Constitution for the reason.

Flap Doodle 3 years, 6 months ago

Wow! An article from 2002! Way to stay current, merrill!

Richard Heckler 3 years, 6 months ago

Another change: Instead of keeping their life-insurance buying secret from employees, companies usually got their consent, often by telling them the insurance would help the company thrive.

That's what Bank of America told managers, says Cristina Deniel, who was a vice president there in 1996. She declined to let the bank buy a policy on her life after she learned the bank would keep the policy in force if employees left, tracking their deaths through the Social Security Administration. "I found that disgusting, frankly," says Ms. Deniel, who left the bank the following year.

Employers today sometimes offer managers incentives to agree to be insured. Ms. Deniel says Bank of America offered a modest payment to a charity of her choice when she died. Bank of America declines to comment on Ms. Deniel's experience.

New York Times Co. uses a different kind of carrot: It permits certain highly paid employees to use a deferred-compensation plan if they let the company make itself the beneficiary of insurance on their lives. About 200 employees have agreed to do so, a spokeswoman for the company says.

At KeyCorp, J. Stephen Reid readily gave consent, but changed his mind when he got a sense of how big the policy was. He learned from an annual report in 1998 that KeyCorp's life insurance on workers had a cash value of nearly $2 billion. Estimating that this translated to $8 billion or more in death benefits, he remembers thinking, "My God -- they're covering people for huge amounts of insurance, and I'm one of them."

Employers rarely tell employees how much they're covered for, but sometimes an estimate can be teased out. Wachovia Corp.'s life insurance has a cash "surrender" value of $6.1 billion, according to the company and its filings with the Federal Deposit Insurance Corp.

That might buy death benefits of a little under $20 billion. Wachovia says it insures about 20,000 lives, implying average death benefits of $952,380. Wachovia says it can't calculate an average death benefit, but calls the estimate high.

Mr. Reid says Key Bank wouldn't tell him how big a policy it had on his life, nor what insurer provided it. An insurance salesman for 38 years, Mr. Reid, 63, calls corporate-owned life insurance "the underbelly of the insurance industry that they don't want you to know about. I know I'm insured for the rest of my life, and I don't like it."

http://online.wsj.com/public/resources/documents/dec_30_one.htm

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