(By Mani) Honeywell International, Inc. (NYSE:HON) is likely to realize a significant earnings benefit from its pension this year due to a combination of factors that many investors may not recognize.
The company is uniquely positioned to enjoy a decline in pension costs this year compared to other companies that face pension headwinds. Honeywell's pension expense is expected to decline by $50 million to $75 million this year, which, in turn, would shift pension from a drag to EPS in 2012 to a modest contributor to EPS.
"A $50-75mm decline in pension expense moves pension from an earnings drag in 2012 to an operating earnings contributor in 2013 (2-4 cents of EPS income in 2013 vs. an expected 3-4 cents of EPS expense in 2012),"Deutsche Bank analyst John Inch wrote in a note to clients.
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This is important given that many other industrial companies are poised to experience pension headwinds in 2013.
Honeywell's pension expense is expected to decline due to reduced interest costs, full-year of benefit from returns on 2012 cash contributions to the pension plan, and superior performance of plan assets.
Service costs, a component of pension expense, which typically increases when interest rates decline, are not expected to increase next year due to shrinkage of Honeywell's pension recipient pool.
"Based on Honeywell's portfolio composition in 2012 we believe the pension plan could handily beat the company's 8% assumed rate of return," Inch noted.
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The majority of the pension assets (about 85 percent) are invested in a combination of stocks and bonds, including Honeywell stock at 8 percent of the total portfolio. Honeywell shares performed solidly last year, providing nearly 20 percent total return.
The balance of the stock portfolio is weighted toward other U.S. large cap stocks and international stocks – both of these asset classes also performed well which bodes well for Honeywell's portfolio.
A gradual increase in interest rates over the next several years should help to narrow Honeywell's U.S. pension plan funding gap (ie, pension plan deficit) which reduces the likelihood of future pension contributions, which averaged over $1 billion annually over the last 3 years.
"In turn, Honeywell should have more money available to allocate to share repurchases and acquisitions that could be highly accretive to operating earnings," Inch said.
New Jersey-based Honeywell, a diversified technology and manufacturing company is expected to report its fourth-quarter earnings on Jan.25. Wall Street expects earnings of $1.09 a share on revenue of $9.52 billion, according to analysts polled by Thomson Reuters.