Here's an inside look, probably the most penetrating yet, on how the ravages of inflation are rotting away the profits and stock prices of corporate America. The damage is shocking, worse than you can imagine. And it makes a mockery of the world's perception of the United States as an economic pacesetter with strong, consistent growth abilities.
Would you believe that nearly a quarter of the nation's 100 largest industrial companies -- 22 to be precise -- have failed to show any earnings growth since 1968 and, in fact, actually wound up on the minus side if you factor in inflation? The list includes some of the best names around -- Du Pont, RCA, Gulf Oil, McDonnell Douglas, American Can and U.S. Steel.
When a company's cost of goods grows faster than its sales, it's trapped in a profit-margin squeeze. That's precisely what's happened to 64 of these corporate biggies over the past decade because of their continuing inability to cope with inflation. And here again, the afflicted include such class names as Coca-Cola, Xerox, Eastman Kodak, Exxon, Union Carbide, Minnesota Mining & Manufacturing and Sears
The stock performances of these 100 companies is even more disastrous. After allowing for inflation, you lost money, would you believe, on 82 of them if you bought the shares in 1968 and still owned them at the end of 1978. The average decline was a distressing 26 percent. Just listen to some of these losses: Du Pont fell 43 percent; General Foods, 39 percent; Colgate Palmolive, 32 percent; Atlantic Richfield, 35 percent; Woolworth, 52 percent; General Motors, 39 percent; Goodyear, 55 percent; W. R. Grace, 56 percent; and International Telephone & Telegraph, 65 percent.
My information comes from Interactive Data Corp, of Waltham, Mass., an international firm specializing in computer-based financial and economic services. At my behest, the folks at Interactive were kind enough to do a computer analysis of the bottom-line and stock results of the country's hundred biggest industrial companies (covering 1968-1978). Interactive marketing manager Bill Parsons used a 6.67 percent annual inflation rate (the rate of the consumer price index) in his calculations, although this figure, of course, has run considerably higher in recent years. Bill Nelson, the firm's chief economist, summed up the results bluntly: "They're unbelievably sick."
What's worse though, is that these dismal trends are very likely to continue.
Now let's go into a little more detail.
Guess who was the single worst earnings performer after adjusting for inflation? Did I hear someone say Chrysler? Wrong. The ailing auto maker placed second, going into reverse at a negative 25 percent rate between '68 and '78. The worst showing was turned in by Litton Industries, which posted a negative 31 percent annual rate.
The entire list of companies that wound up in minus territory follows, with their real percentage loss in net income between 1968 and 1978:
Litton Industries, -30.97; Chrysler, -25.06; Firestone Tire & Rubber, -14.75; Bethlehem Steel, -13.87; Texaco Inc., -4.40; Occidental Petroleum, -4.08; Goodyear Tire & Rubber, -3.90; McDonnell Douglas, -3.49; National Steel, -2.80; Gulf Oil, -2.37; City Investing, -2.34; Republic Steel, -1.87; Cities Service, -1.42; Greyhound, -1.37; Continental Group, -1.26; Woolworth -1.12; Jewel Cos., -0.97; RCA, -0.80; Du Pont, -0.77; Amerada Hess, -0.54; American Can, -0.43; and U.S. Steel, -0.13.
If one measures the real growth of all 100 companies, the average profit gain comes to a paltry 3.6 percent a year over the past decade. General Motors, for example, just managed to make it into plus territory with an 0.5 percent increase. Ma Bell was a below-average performer with a 3 percent yearly hike. The devastation of inflation probably can be understood best when you look at what it's done to the classiest growth companies around. For example, IBM's real earnings gains over the last 10 years were just under 7 percent. And in Xerox's case, it was less than 5 1/2 percent.
You can't blame it all on inflation. Competition, especially from imports, has increased sharply. And then there's inept management, which has failed to channel company activities into the most productive areas.
Nelson offers another thought. He blames much of the shoddy earnings showing on the failure of the United States to put more of the nation's output into capital outlays (namely plant and equipment). "We're putting only 10 to 12 percent of the gross national product into capital expenditures, while most of Europe is close to 20 percent and Japan is at 24 percent," he said. "We're spending so little that the productivity of the U.S. worker is growing more slowly than any other worker in a developed country in the free world. And unless we give business more incentive to invest -- be it lower corporate taxes or faster depreciation of equipment -- we'll have more of the same rotten earnings trends."
You know some of the bad guys on the earnings front, but how about the good guys? Here's one that will surprise you. Remember those dark days for Lockheed when there was widespread fear that the giant aerospace maker could go under? Well that very same Lockheed turned in the single best earnings showing of the 100 top companies after adjusting for inflation. It racked up an annual 53 percent profit gain over the past decade. The runner-up was Trans World Airlines Inc. with a 29 percent increase, followed by United Airlines with a 21 percent rise.
Unadjusted for inflation, the Dow Jones Industrials fell 15 percent in the past decade; adjusted, a wicked 55 percent. But numerous stocks tumbled a lot further. The worst was LTV, down 96 percent between 1968 and 1978. Chrysler followed with an 88 percent drop, Litton was third, off 82 percent. And Lockheed, despite its earnings leadership, placed fourth with a 77 percent decline. IBM, by the way, rose 47 percent over the 10-year period unadjusted for inflation. But it failed the true test; adjusted, it fell 23 percent.
On the plus side, Philip Morris led the gainers with a 179 percent advance. Halliburton, at 142 percent, was second. Rounding out the top five were Deere, 85 percent; Boeing, 72 percent; and Standard Oil Co. of Ohio, 56 percent.