The Only Good Way To Look At Corporate Earnings

Posted On October 21, 2016 12:20 am

It’s that time of year again folks, earnings season. When investors obsess over the minutiae of a company’s results, pour over guidance, and analysts send out a wave of upgrades and downgrades. However, you need to keep two things in mind.

First, and foremost, whether or not a company “misses” or “beats” expectations? That is completely irrelevant. Think about it this way. Analysts decide on consensus estimates by plugging in dozens or even hundreds of variables into spreadsheets that spit out a guesstimate. Why is it management’s responsibility to hit such a random target? Shouldn’t it be up to the analysts to prove their understanding of a company, and the validity of their models, by getting as close as possible to the actual results?

After all, you can find 1 year, 3 year, and even 10 year growth forecasts online, via numerous sources. Wouldn’t it be of far greater value to know which analysts are the most accurate? And then use their research to due your own due diligence?

Instead we have “hits” and “misses” that can result in swings of 5% to 10% in a single day for even blue chip stocks.

Just this week we saw McDonald’s, Johnson & Johnson, IBM, and Intel release good results, but because they either didn’t live up to expectations, or because analysts didn’t like the company’s guidance, shares cratered once results were out.

Now here is the biggest secret on Wall Street, at least in terms of generating long-term market beating results. EARNINGS DON’T MATTER!

In the long-term of course they do, because as grand father of value investing Benjamin Graham said “in the long-term the market is a weighing machine”.

But over a single quarter? A single year? That is largely irrelevant. Really just something for investment writers such as myself to pour over to adjust our models, and make sure the investment thesis isn’t broken (and 99% of the time it isn’t).

In other words, not something to get overly excited over.

BUT that doesn’t mean you should ignore earnings season. Far from it, because the overreaction of the market can be a GREAT opportunity to add shares of quality dividend growth companies, especially in beaten down, cyclical industries such as energy, industrials, railroads, and agricultural supplies.

Case in point, Union Pacific, a fantastic dividend growth blue chip just reported some ugly numbers, that really weren’t a surprise to anyone who’s been paying attention to the railroad industry over the past year. Yet the market freaked out and dumped shares to the tune of nearly 7% today. I was lucky enough to use this short-term stupidity to open my initial position.

Similarly, Travelers, W.W. Grainger, J.M Smucker, and Genuine Parts Company all have gotten hammered on “bad earnings”. Now remember that we are talking some of the best dividend growth stocks in the world here folks. Some of these companies have dividend growth streaks lasting decades, and spanning numerous economic, and interest rate cycles. In other words, a bad earnings quarter, or even a bad year, isn’t going to put the dividend in danger, or even likely threaten the dividend growth in the short-term.

So that’s why the only reason I recommend anyone even bother keeping up with earnings is for the buying opportunities. Otherwise? Just ignore the noise and keep on counting those dividends as they come rolling in. Trust me, (and the academic data spanning decades) you’ll be glad you did.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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