The US second quarter earnings festival kicks off tonight, US time when reports issued by Delta Airlines and giant fund manager, Blackrock release what will be solid figures.
On Friday though the season really gets underway with March quarter reports from banks, JP Morgan, Wells Fargo and Citi. Next week around 60 companies in the S&P 500 list are due to release their reports and the following two weeks will see over 300 companies report.
And while analysts are looking for 17% to 18% growth in earnings (which some of that coming from the unfunded tax cuts of President Trump), the real story will be two other areas – dividend increases and buybacks.
Analysts forecast more of what we saw for the December quarter of 2017. Some analysts reckon that by the end of 2017, buybacks will top $US800 billion – 60% more than 2017 (https://www.bloomberg.com/news/articles/2018-01-03/how-much-can-buybacks-rise-on-tax-cuts-this-estimate-says-70).
February (when the December quarter reporting season peaked) saw a rush of share repurchases, with the value of announced stock buybacks surging to a record $US153.7 billion from $US59.9 billion in January, according to US financial data group, TrimTabs. February’s record also topped the previous monthly record of $133 billion set in April 2015.
Returning capital to shareholders through buybacks also serves to boost earnings by reducing the outstanding share float and boosting bonuses of senior managers, led by the CEO, the chief financial officer, senior divisional heads and of course the board.
That’s because bonus (cash and shares) are linked to growth in the share price and growth in earnings per share. Buybacks achieve both. US analysts at Credit Suisse estimate that buybacks are likely to contribute 2 per cent to earnings in the first quarter.
By the way the Well Fargo result will be one of the most interesting of all US reports because it will reveal the first impact of the US Federal Reserve’s order to the bank to freeze its balance sheet at end of 2017 levels ($US1.95 trillion) as punishment for miss-selling of financial products to customers (and the abuse of staff) and false accounts and credit cards, and the selling of useless car insurance products to around 600,000 customers, many of whom didn’t need it.
There are rumours this week that Well Fargo (which was fined $US185 million for those abuses) is facing an even bigger fine for other abuses that have come to light in recent months in funds management and in its retail bank.
The Fed’s punishment of freezing the balance sheet effectively stops Wells Fargo from growing its lending and forces it to cut assets in areas to maintain growth in others – such as home mortgages.
The balance sheet freeze should be looked at as an option by the Royal Commission in Australia for banks with egregious breaches, such as the Commonwealth.
