Buffett, Dimon Write Op-Ed Railing Against Earnings Guidance; Fail To Mention Stock Buybacks

Prompting some to question "why now", late on Wednesday the two "titans of financial industry", Warren Buffett and Jamie Dimon doubled down on their appeal to corporations to stop providing quarterly earnings guidance (at a time when virtually every intellectually honest bank admits the economy is very, very late in the cycle).

The Berkshire and JPMorgan CEOs said in a joint WSJ editorial that they are encouraging all public companies to consider moving away the practice, arguing that it can stifle long-term investments.

"Quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability."

A 2017 report by FCLTGlobal similarly found that guidance can lead management teams to under-invest in the future and can crimp earnings growth.

Their plea is not new, as both have in the past urged management teams to halt providing guidance as the practice of telling Wall Street what to expect from earnings distorts management’s priorities.

In their latest appeal, the duo said companies often hesitate to spend on technology, hiring, and research and development to meet quarterly earnings forecasts that can be affected by seasonal factors beyond their control. Dimon and Buffett also said the pressure to meet short-term earnings estimates has contributed to a drop in the number of public companies in the U.S. in the past two decades.

"Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity."

Earnings forecasts “can often put a company in a position where management, from the CEO down, feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon said Thursday in an interview with CNBC. “We’re hoping a bunch of companies drop it right away.”

Back in 2016, Dimon, Buffett and Larry Fink similarly urged companies to refrain from short-term earnings forecasts in a letter and report sent to  other financial industry executives. They offered “common-sense” recommendations for public companies to improve governance and relations with shareholders, although these were largely rejected.

Yet what is ironic is that Buffett and Dimon appear to be focusing on the wrong thing: as Bloomberg reports, the FCLTGlobal report found fewer than a third of S&P 500 companies still issued quarterly guidance in 2016, down from 36 percent in 2010. About 31% gave annual earnings-per-share guidance. Companies including Unilever NV, Facebook Inc., GlaxoSmithKline Plc and BP Plc have scrapped the practice in favor of multiyear outlooks, according to the report.

Yet what virtually all companies do, is issue mountains of debt and use the proceeds to repurchase their stock, a process which many - such as Larry Fink - argue is far more debilitating to corporate growth than issuing simply guidance which, since GAAP accounting is dead anyway, companies have little problems beating. After all, it was Apple's gargantuan buyback and shareholder friendly plans that prompted Buffett to become the 3rd largest shareholder in Apple.

We mention this only because while Dimon and Buffett rail against issuing guidance, perhaps because they two are CEOs of public companies that get numerous questions about the future, there was exactly zero mention of the artificial market support mechanism that is stock buybacks, and which as we reported earlier this week, just hit an all time high in Q1.

For those who like cliches, the full Dimon-Buffett op-ed can be read here.

Comments

Endgame Napoleon I woke up Thu, 06/07/2018 - 09:08 Permalink

They are right, but this article is right, too, in that the business class always tries to use confession of the more trivial sin as a marketing device.

The American-in-name-only, offshoring, outsourcing stock buy backers could instead spend the money on training US citizens that they intend to keep on a permanent basis, rather than churning temps. 

It is possible that some companies are. There is no perceptible decrease in the gargantuan number of out-of-the-workforce citizens, but they may be training some young citizens (or noncitizens.....).

One of the employment reports that Tyler posted showed a slight decrease in temp workers, or maybe, it was a lack of growth in temp jobs. 

Stock brokers should not fail to inform their own affluent customers about short-term risks, though, because their job description is to serve their own customers, not Americans at large who are NOT in the market for stocks. We cannot even afford housing in a huge number of cases.

But sooner or later, the willful s******g of most non-welfare-eligible, American citizens for short-term gain—decade after—decade—until the last barely middle-class consumer is gone is going to trickle up. 

In reply to by I woke up

Endgame Napoleon shizzledizzle Thu, 06/07/2018 - 09:14 Permalink

Those of us who are not math people just have to take your word for it, unfortunately, but it seems like overall patterns in the numbers would be hard to detect when looking at the numbers every month (or quarterly) and then using whatever the momentary numbers are as a marketing ploy to gin up short-term profit, managers’ salaries, shareholder dividends or whatever for the benefit of a few.

In reply to by shizzledizzle

El Hosel Thu, 06/07/2018 - 08:25 Permalink

More QE, less guidance. Quit messing around with reality and kick this "recovery" into high gear.

Welcome to Dirtyfuckerville, have a nice day.

ejmoosa Thu, 06/07/2018 - 08:36 Permalink

The game that has been earnings per share growth is nearly up and they know it.

 

This gimmick allowed companies such as Home Depot to report higher earnings per share years sooner than they were making more total dollars in profit after the 2008 collapse.

 

Installing a false sense of confidence, it got investors to bid up the stock even though they were far from doing as well as they had done in the past.

 

The reverse is now set to happen, and all the con artists know it.  

PunchyBinThinkn Thu, 06/07/2018 - 08:42 Permalink

As lame as it might seem, stock buybacks peak at market tops!  A few years back, aapl was issuing shares, NOW AT MUCH HIGHER PRICES, THEY'RE BUYING THEM BACK?????

NotGonnaTakeIt… Thu, 06/07/2018 - 08:59 Permalink

A 'titan' of finance? Dimon is the head of a bank that paid BILLIONS of dollars in fines and lost BILLIONS of dollars of stockholder's equity in risky trading. He should rightfully have resigned or gone to prison- but instead the idiot shareholders continue to reward him. The next recession is almost upon us, higher interest rates will collapse housing and credit card payments and auto payments.

 

Wall Street won't be talking about shrinking bonuses, they'll be running for their lives from sick and tired Americans who will be coming for them with pitchforks and torches. 

 

England throws a reporter in jail for reporting about Muslim rape gangs and then makes it illegal to report on what happened to the reporter! Meanwhile, American greed by the CEOs knows no bounds. It's only a matter of time before American Guy Fawkes, millions of them, take to the streets.

Let it Go Thu, 06/07/2018 - 09:03 Permalink

Among all the recent news about euphoria and a market "melt-up" several reasons exist to be cautious. During the last two and a half years central banks and countries around the world have added more fuel to the fire which has postponed the day of reckoning. This has made all of us thinking the market was about to turn south looking rather silly and underscores the fact that trying to time economic events is both confusing and complex. Still, the fact the numbers do not work means reality will be visiting us soon. The reasoning is outlined below.

http://Economic Reality Will Soon Be Knocking On The Gate.html

mendigo Thu, 06/07/2018 - 09:38 Permalink

Clearly they are on to something judging from amszon netflix etc profits are passe.

The incompetence of the public corp is not a result of ecxessive monitoring.

Management of a corp is focused on continued success of the management same as .gv

JailBanksters Thu, 06/07/2018 - 09:41 Permalink

Tell people exactly what they think they need to know.

Which is exactly the Opposite, can't be any more BLACK & WHITE than that even using a Compass and a Square.