During the fourth quarter, 28 of the 30 companies in the Dow Jones Industrial Average reported charges and gains related to the recently passed tax law. Overall, 19 DJIA companies reported a net charge for the quarter due to tax reform while nine DJIA companies reported a net gain for the quarter due to tax reform. Two DJIA companies (Apple and Nike) did not provide any specific numbers on the impact of tax reform in their earnings releases.
All 28 of these companies provided both GAAP EPS numbers (including the impact of the tax charges and gains) and non-GAAP EPS numbers (excluding the impact of the tax charges and gains and excluding other items as well) for the fourth quarter. Given the unusually large nature of some of the charges and gains related to the tax law, what was the aggregate dollar level impact of these tax law items on GAAP earnings for DJIA companies for the quarter?
How Much Did the Tax Law Increase or Decrease GAAP Earnings for the Quarter?
For this analysis, FactSet collected the GAAP EPS numbers reported by each company in the Dow 30, weighted the GAAP EPS by the shares outstanding, and aggregated the share-weighted earnings numbers to arrive at an approximate GAAP earnings number for the entire Dow 30.
On a GAAP basis, aggregate earnings for the DJIA were approximately $42.2 billion for Q4 2017.
FactSet then excluded the EPS impact of the net charge or gain associated with the tax law reported by each company, weighted the GAAP EPS excluding only net tax charges or gains by the shares outstanding, and aggregated the share-weighted earnings numbers to arrive at an approximate GAAP earnings number excluding the impact of tax reform for the index.
On a GAAP basis excluding tax reform, aggregate earnings for the DJIA were approximately $75.6 billion.
Thus, tax reform charges and gains in aggregate reduced GAAP earnings for the DJIA by approximately $33.4 billion dollars (or by 44%) for Q4 2017. The five companies in the DJIA that announced the largest net charges due to tax reform are listed in the chart below.
Finally, FactSet collected the non-GAAP EPS numbers reported by each company (which excluded the net charge or gain associated with the tax law and other items selected by each company), weighted the non-GAAP EPS by the shares outstanding, and aggregated the share-weighted earnings numbers to arrive at an approximate non-GAAP earnings number for the index.
On a non-GAAP basis (excluding tax reform and other items), aggregate earnings for the DJIA were approximately $101.8 billion.
FactSet then used these numbers to calculate year-over-year earnings growth rates for Q4 2017. On a GAAP basis, the DJIA reported a year-over-year decline in earnings of -46.0%. On a GAAP basis excluding tax reform, the DJIA reported a year-over-year decline in earnings of -3.3%. On a non-GAAP basis, the DJIA reported earnings growth of 10.5%.
For all calculations, GAAP EPS (and non-GAAP EPS) from continuing operations were used when provided. Non-GAAP EPS numbers excluding tax impact were used for Boeing and General Electric. Pro-forma GAAP EPS (and non-GAAP EPS) were used for DowDuPont.
John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.