Companies that suspended quarterly earnings-per-share (EPS) guidance during the coronavirus crisis because of severe business volatility may want to consider permanently halting the reports, which often provide limited value to investors, McKinsey said in a commentary.
“A growing body of evidence, going back more than a dozen years and continuing today, suggests that such guidance can be more of a distraction than a help to investors and that many of them don’t put as much weight on quarterly EPS guidance as executives believe they do,” McKinsey said.
Companies that resume quarterly EPS guidance after the coronavirus fades should ensure they’re providing “the most useful data—the operating metrics and key indicators that give investors a broader, longer-term view of corporate performance,” according to McKinsey.
Fifty-two percent of the 285 S&P 500 companies that have historically offered annual EPS guidance said last year that they did not plan to provide the reports for fiscal years 2020 and 2021, FactSet said in October. Almost all of the companies cited the uncertainties caused by COVID-19.
As of March 26, 94 S&P companies issued EPS guidance for the first quarter of 2021 compared with the five-year average of 101 companies that usually provide such reports, according to FactSet.
“Even before the COVID-19 crisis, many finance leaders were second-guessing the impact of quarterly or annual earnings guidance,” McKinsey said. “Since executives have already experienced the effects of temporarily suspending quarterly earnings guidance, they can feel emboldened to do away with such guidance altogether.”
“A better way to measure performance might be to borrow from how early stage companies and their management are evaluated,” according to Mayur Vyas, CFO at Finconoso, a consulting firm focused on accounting, tax and other services. “Having little to no revenue, metrics are based beyond the financials and are unique to the industry and business model.”
“Firms should defer using EPS guidance again for 2021 and find more relevant measures,” Vyas said. “This may help to reduce pressure to hit certain targets and provide new consistent data."
Prior McKinsey research found companies that did not provide EPS guidance did not generate lower total returns to shareholders than companies that did.
Total returns to shareholders fell “only if companies missed consensus consistently over several quarters because of systematically lower performance,” McKinsey said.
Excessive emphasis on quarterly earnings to measure performance of company management “can create unnecessary noise in corporate boardrooms.”
“More important, EPS-focused companies are known to implement actions to ‘meet the number’—deferring investments or cutting costs excessively,” McKinsey said. “Such moves might end up hurting the business.”
Editor’s note: This story has been updated to include comments from Finconoso CFO.