As most public companies now are in the process of compiling year-end 2008 financial information for their upcoming earnings releases, many are faced with significant challenges in determining what to say to investors. Uncertainty surrounds issues such as extreme turbulence in end markets; rapidly deteriorating business conditions and performance; depressed and volatile stock prices; an immediate need to cut costs and right-size operations; and ability to maintain the current dividend. In addition, lack of visibility regarding current and future performance in times like these make it difficult to provide reliable earnings guidance, and sometimes necessitates revisions to previous guidance.
Based on Dix & Eaton’s deep experience across a diverse client mix, we advise that you keep the following in mind when dealing with these issues:
- If warranted, any earnings and guidance preannouncements should occur during this “quiet period” between the end of the quarter and the issuance of the earnings release. In most cases, such guidance revisions should be announced only when actual or near-actual results for quarter are clear, and a meaningful range of estimates can be established.
- Now would also be the time to suspend or revise earnings guidance for future periods due to end-market volatility, deterioration of the economy and the resulting lack of visibility. Before suspending guidance, however, the company must carefully weigh the risks of allowing analysts to develop estimates on their own. Generally, if even a broad earnings range can be given with a certain amount of confidence, it better than no guidance at all.
- Vague announcements for either the current quarter or future periods – especially those that do not provide specific lower limits to earnings guidance – could unnecessarily subject the company to increased stock volatility and unwarranted downward stock price pressure. Investors likely will assume a worst-case scenario, and could question the company’s ability to meet its debt covenants and pay a dividend.
- Regarding the dividend, if the company decides it cannot be sustained at its current level, a reduction rather than complete suspension could soften the shareholder reaction and reduce the downside stock price pressure. In this situation, income holders would not be forced to sell their stock positions as they would if the dividend were suspended. In addition, and depending on the magnitude of the reduction, recent investors may determine that they still have an adequate safety net yield to justify waiting for the stock to recover.
As a firm, we are strong proponents of transparency, timeliness and maintaining management’s credibility. However, issuing premature or ambiguous information regarding financial performance is likely to do more harm than good, as well as damage credibility. One of the primary roles of communication is to reduce uncertainty. Any announcement – whether it be a regular quarterly earnings release, revision of guidance or change in the dividend – should include as much detailed information, insight and management perspective as possible on current performance and expectations for the future.