What have you done for me lately?
What on earth are you likely to do next?
In these unpredictable market times, it pays to ask hard questions of your investments.
The 1996 annual reports from more than 12,000 different companies, now piling into the nation’s mailboxes, provide some reality checks for shareholders.
On the cover of the PepsiCo Inc. report, for example, is a photograph of the bright-red Cat’s Eye Nebula, 300 light-years away in space.
The report notes the Hubble Telescope has offered a clearer “window on the universe.” PepsiCo is trying to look at itself from a “new perspective” as well, chairman and chief executive officer Roger Enrico explains in the report.
He said the firm hopes to put behind it a tough year in which total earnings declined, its international beverage business had big problems and its U.S. restaurants underperformed.
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Such honesty is the prevailing policy in the latest reports.
“Honesty is doing pretty well this year, with nine out of 10 CEOs writing really honest letters to shareholders that refer to specific numbers, which is an encouraging sign,” observed Sid Cato, publisher of Sid Cato’s Newsletter on Annual Reports. “Furthermore, the number of annual reports with very clear mission statements explaining what the company stands for and where it is headed has grown significantly.”
The latest hubbub concerns huge financial gains enjoyed by many CEOs during a booming 1996 when their pay was increasingly linked to company results. Enormous corporate profits meant mindboggling stock option opportunities and the latest annual reports do take that into account.
“Since the hot topic has been stock options for executives, look for the footnote that discloses the impact of options granted on the company’s pro forma earnings,” advised Edward Nusbaum, national director of assurance services with the Grant Thornton LLP accounting firm. “This is the first year that’s been required and, while admittedly subjective, it’s a disclosure worth examining.”
Study not only earnings, but quality of earnings, by reading all footnotes and focusing on cash flows. The chief executive’s letter is one portion not dictated by the government. Look at the auditor’s opinion to make sure it’s unqualified. Perhaps examine the back of the report first, since a report’s text may be upbeat, but numbers speak for themselves. Each portion of the annual report is just a snapshot, so you must do your homework.
The latest batch of reports cost more than $8 billion to produce, according to Cato. Average price per copy is $3.07, slightly more than last year. Eighty-nine percent have four or more colors and many have switched to a magazine format. There are also annual reports on the Internet, video cassettes, computer disks and CD-ROMs.
Some companies coping with industry change want to explain it to current and prospective investors. The Ameritech annual report, deemed a “quick read” and best of the lot by Cato, applauds passage of the 1996 Telecommunications Act.
“There’s confusion about the whole telecom industry, and we want to sweep away the confusion,” explained George Stenitzer, director of corporate positioning for Chicago-based Ameritech, who says the report-making process starts in discussions with the company’s CEO. “The annual report is not a yearbook, but the No. 1 source of information for our investors, so we focus on the industry, its growth potential and the future.”
Two-thirds of Ameritech report readers are individuals and the remainder institutions, so the report must strike a balance. Ameritech’s 1.3 million six-color reports, thanks to economies of scale, cost just 75 cents a copy to produce.
Many reports tackle gut level issues. Steel company Armco Inc.’s report offers a roundtable discussion with key executives on their strategy to “restore earnings power.” Pittsburgh-based Armco’s shareholder base has shifted from 70 percent individuals to 70 percent institutions in the past 20 years, so the company decided to be more analytical this year. “We might not win any design contests, but our report has always been content-oriented,” said Jim Herzog, manager of corporate affairs.
Ranked as the 15 best of more than 200 annual reports analyzed thus far by Cato are, in order: Ameritech; Southern Co.; Armco; Northwest Natural Gas Co.; Chevron Corp.; Hillenbrand Industries Inc.; Reuters Holdings PLC; Sonoco Products Co.; Monsanto Co.; Apogee Enterprises; Amway Japan Ltd.; Unisys Corp.; IKON Office Solutions; Scotiabank, and Norwest Corp.
Cato grades design, writing, special sections, explanation of company competition and market position, photos, manager biographical data and overall theme.