Profits: A Dirty Word?

05/02/2011 10:35 am EST


Terry Savage

Author, The Savage Truth on Money

Every three months, publicly traded companies report their earnings—their profits, or losses. And this quarter, the profits have been surprising, even to the professional forecasters.

In fact, out of the more than half of all S&P 500 companies that have reported so far, 74% have beaten earnings estimates, and 70% have beaten revenue estimates, according to Thomson Reuters. That good news about profits has contributed to the market’s new highs.

Industrial companies like Caterpillar (CAT), auto manufacturers like Ford (F), and drug companies, such as Merck (MRK), all “surprised” Wall Street with better than expected earnings. As did companies ranging from Microsoft (MSFT) to McDonalds (MCD).

Oil companies like Chevron (CVX) also outperformed forecasts, as did Exxon Mobil (XOM) and Royal Dutch Shell (RDS).

Good News or Bad?
To be specific, let’s take Chevron, which just reported quarterly profits of $6.2 billion, compared with $4.6 billion in the first quarter a year ago. On a per-share basis, Chevron earned $3.09 per share for the quarter, compared to $2.36 in the first quarter of 2010.

So, is that good news or bad?

Analysts had been expecting Chevron to report earnings of $3.00 a share, so the stock closed about 0.5% higher on the day of its earnings report.

Since Chevron is one of the 30 stocks in the Dow Jones Industrial Average, it contributed to an up day for the “market,” as measured by the Dow. That usually makes people feel good.

And if you have a 40l(k) account invested in a stock mutual fund, your retirement prospects look a bit brighter, because your account likely increased slightly in value.

Even better news: At the same time it reported its higher earnings, Chevron also said it was increasing its dividend for the quarter by 8.3 percent, to 78 cents a share. The company now pays out about 24% of its earnings in dividends, something that warms the hearts—and wallets—of investors.

The good earnings are probably good news to the remaining 60,000 Chevron employees, given that the company “restructured” its refining and retailing operations last year, cutting an estimated 2,000 employees.

Think of it this way: When a company has profits, it can afford to hire. McDonalds just reported higher earnings and went on a 50,000-person hiring binge!

NEXT: The Other Side of the Story


The Other Side of the Story
By now, you might be digging in your heels as this analysis progresses.

But wait a minute: As this company was increasing earnings, it was also raising gas prices at the pump!

It’s true that Chevron is not only an oil-exploration company, but an oil refiner and a gasoline retailer, with more than 8,100 gas stations in the United States and Canada. Certainly, some of the company’s profits come from higher gasoline prices at the pump, along with the higher prices it gets for the oil it discovers around the world.

So now we know what Chevron does with some of its profits:

  • Some gets paid out in dividends.
  • Some gets spent on exploring for oil, which is probably good news since America remains dependent on oil.
  • And some of the profits are used to pay employees—who, as noted above, are glad to have jobs.

The CEO should be especially glad. Last year, Chevron’s CEO, John Watson, was paid $14 million, according to an analysis of the company’s proxy statement.

To be fair, a good portion came from an increase in the value of his stock options, an increase that also benefited all shareholders. But Watson also got a 56% increase in basic salary, to $1.47 million, along with a performance bonus of $3 million.

Even the most devout defender of free-enterprise capitalism must call this paycheck insensitive, to say the least. But that’s not the worst part of the story.

It seems that, after payroll and exploration costs, very little of those profits go to paying taxes. As Vermont Sen. Bernie Sanders pointed out last month, Chevron is one of ten giant US companies that paid no taxes in 2009.

In fact, Chevron received a $19 million refund from the IRS last year—after it made $10 billion in profits in 2009—because it was able to use the tax code to defer its $147 million tax liability.

What’s wrong with this picture? That’s what millions of Americans are asking as they pay ever-higher prices at the pump.

No matter that the real problem is our lack of an energy policy and dependence on foreign oil. No matter that the sinking value of the dollar, on which all oil trades are based, has lifted the price of crude in global markets. No matter that much of the fault lies with our politicians for destroying the value of the dollar.

The oil industry is a huge and well-deserved target—because they’ve painted a giant bullseye right on themselves.

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