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Article | Executive Pay Matters

Consumer staples sector pay-for-performance update: Second quarter results threaten incentive payouts

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By Jamie Teo and Michael Biggane | October 2, 2019

Recent economic instability, particularly on the international trade front, heightens challenges faced by the consumer staples sector, as indicated by the analysts’ mixed expectations for growth in 2019.

The consumer staples sector financial results through the first two quarters of 2019 trended below the same period last year and are tracking at or below analysts’ estimates for the year.

This quarter’s blog updates 2019 performance trends and expectations for the consumer staples sector, complementing our last update that focused on the pay implications based on 2018 performance. Annual incentives for 2018 dropped to a below-target payout while long-term incentives (LTI) soared to an above-target payout at the median from an at-target payout the year prior (For more details, see “Consumer staples sector pay-for-performance update: 2018 incentive plan payouts trend below target,” Executive Pay Matters, July 16, 2019.)

Figure 1 reviews early 2019 expectations compared with 2018 results. Analysts anticipate mixed financial results — as illustrated by a deceleration in revenue and earnings per share (EPS) growth but increased earnings before interest and taxes (EBIT), cash flow and return on equity (ROE) growth.

Figure 1. Consumer staples sector analysts’ growth expectations for 2019
Figure 1. Consumer staples sector analysts’ growth expectations for 2019

Source: S&P's Capital IQ database

Figure 2 shows financial performance results are down in the first half of 2019 compared to the same six-month period last year:

  • Income statement growth and margins are generally lower versus last year, with the largest decline in EPS performance.
  • Return measures are also below last year’s results.
  • Cash-flow growth turned negative.
  • Despite double-digit total shareholder return (TSR) over the first six months, sector performance in the third quarter has been volatile, similar to the broader S&P 1500.
 
  Consumer staples sector median*  
Measures 1st half 2018 1st half 2019 2019 trend
Income statement      
Revenue growth 4% 3% This is a red arrow pointing down indicating a downward trend
Earnings before interest and taxes (EBIT) growth 2% 1% This is a red arrow pointing down indicating a downward trend
Earnings per share (EPS) growth 15% -2% This is a red arrow pointing down indicating a downward trend
EBIT margin 12% 13% This is a green arrow pointing up indicating and upward trend
Net income margin 12% 7% This is a red arrow pointing down indicating a downward trend
       
Balance sheet      
Return on net assets 14% 13% This is a red arrow pointing down indicating a downward trend
ROE 18% 13% This is a red arrow pointing down indicating a downward trend
EBITDA**/interest expense ratio 11 9 This is a red arrow pointing down indicating a downward trend
       
Cash flow      
Cash-flow growth 4% -1% This is a red arrow pointing down indicating a downward trend
Cash-flow return on net assets 11% 10% This is a red arrow pointing down indicating a downward trend
       
Market-based measures      
Price/earnings ratio 22 24 This is a green arrow pointing up indicating and upward trend
Total shareholder return (TSR) -8% 16% This is a green arrow pointing up indicating and upward trend
       

Figure 2. Consumer staples sector first-half performance scorecard

*Financials through first two quarters; TSR represents composite performance through June 30, 2019
**Earnings before interest, taxes, depreciation and amortization
Source: S&P's Capital IQ database

Analysts have generally mixed expectations for the consumer staples sector as the year has progressed, and actual results are trending below these expectations. This implies that annual incentive payouts could again decline following the drop in 2018, which could escalate retention concerns. Where 2019 incentive payouts end up will depend on whether companies took a conservative approach when setting 2019 incentive plan goals. The second half of 2019 continues to be an arduous battle for the sector as it strives to innovate to keep pace with ever-changing consumer habits and contend with emerging competitors. In addition, the raging trade war between the U.S. and China poses a major threat. Such obstacles could continue to challenge the sector’s performance.

Have you considered bringing additional analytics to the goal-setting discussion, particularly if your incentives are on track for another below-target payout? Willis Towers Watson’s predictive performance model (PPM) helps clients measure the probability of achieving goals and aligning pay and performance. To learn more about PPM, follow the link here and watch a brief video (mid-page) explaining how our model can help you calibrate your incentive plan goals.

For a look at first-half results for 2019 in the broader S&P 1500, see “S&P 1500 pay-for-performance update: Will weaker 2019 performance reduce incentive payouts?Executive Pay Matters, October 2, 2019.

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