For decades, investors have relied on quarterly earnings for clues about their investments. But this week, President Trump decided it was time to rethink the system.
“Did you ever hear the statement that, ‘China has a 50 to 100 year view on management of a company,” he posted on Truth Social, “whereas we run our companies on a quarterly basis???’ Not good!!!”
Trump wants U.S.-listed companies to report earnings every six months instead. In his words, it would “save money and allow managers to focus on properly running their companies.”
If this gets adopted, it would mark one of the most significant shifts in U.S. financial reporting in more than 50 years.
The Security and Exchange Commission (“SEC”) gave up semi-annual reporting back in 1970 after discovering too many companies were hiding profits from investors. And so, it was decided that these publicly traded businesses needed to be kept on a tighter leash so investors could be better protected.
Today, Canada still uses semi-annual reports. But most European companies, including the U.K., did away with the quarterly model in the mid-2010s. And there have been plenty of studies ever since on which way is better, making room for plenty of debate with no easy answer.
I have to admit, I wasn’t impressed with the idea when I first heard Trump’s announcement. But, as with most other investing questions, there really are two sides to the story.
So let’s examine them both.
Six-Month Reporting Can Be Three Months Too Late
My first concern is obvious: transparency. Would companies resort to unethical – or even downright illegal – accounting practices again?
Longer gaps between reports opens more room to manipulate earnings, hide weaknesses, or delay bad news.
Professor Salman Arif from the University of Minnesota’s Carlson School of Management explains it well:
If we want to reduce accounting fraud, reduce opportunities for insider trading, improve the strength of our capital markets, and allow companies to invest for the long run, I think more transparency is truly beneficial.
I have a second concern however, and it might be even more significant…
Having been a Wall Street writer for over 16 years now, I know that many of my 100,000-plus followers appreciate quarterly earnings because they can provide early warning signs for their portfolio.
For example, let’s say company Exwhyzee announces first-quarter earnings per share (“EPS”) of $1.00 and a dividend of $0.80 per share – an 80% payout ratio. Not perfect, but sustainable.
But then, in the second quarter, EPS falls to $0.80, while the dividend stays at $0.80. Now the payout ratio is 100% – a red flag that cash flow is drying up.
As an analyst, I would immediately put the company on my dividend-cuts watchlist. And I’d most likely mark it as a Sell.
But under Trump’s proposed six-month system, I’d have to wait another three months to find out this negative news. At that point, it could be too late. Exwhyzee might have already slashed its dividend – and the stock price along with it.
For investors, President Trump’s redirection could be the difference between sidestepping a loss and taking a direct hit.
Then Again…
Despite my misgivings, I decided to give the six-month earnings reporting idea a fair shake. That included asking about half a dozen CEOs what they thought about it.
The results?
Every single one said that quarterly earnings reports cause more harm than good.
Chris Volk, former CEO of STORE Capital and current chairman of Tenet, told me, “CEOs should be thinking five years out,” not one quarter.
Quarterly deadlines encourage short-termism. Companies under pressure to “make the numbers” often cut corners – all at the expense of long-term health.
Baruch Lev, author of one of my favorite books on investor relations, Winning Investors Over, explains it this way:
The widely held perception of short-term investors dominating capital markets seriously distorts the decisions of the many managers who believe they have to cater to investors’ myopic whims by beating analysts’ consensus estimates by any means and continuously reporting EPS.
Such beliefs in myopic investors trigger most of the manipulations of financial reports and often lead to detrimental decisions, such as cutting R&D and maintenance, making ill-advised acquisitions, or repurchasing shares in order to make the numbers.
So all of this raises the question: Did the SEC solve one problem in 1970 but create another?
Fortunately, I have a solution no matter what happens to quarterly reporting from here.
It’s All About Management
Here at Wide Moat Research, we’ve learned that the real determinant of a company isn’t how often they report… it’s about who’s running them.
As I explain in my book, The Intelligent REIT Investor, “Bet the jockey, not the horse.” Strong management teams navigate recessions, regulations, and crises. Weak ones stumble no matter how often they disclose results.
In extreme cases, a great company with a good product or service can fall apart due to laws, societal advancements, or other winds of change. But the vast majority of the time, stellar management can navigate through difficult times and even crises.
I also should quote my European investment contact, Leo Nelissen here. He told me that:
In Europe, semi-annual reports haven’t created regulatory oversight issues, as there still is no room for fraud. On top of that, many companies are free to reveal as much data as possible. Railroads, for example, report weekly shipments. Caterpillar reports monthly sales.
Regardless of what Trump decides, either system will work out. It just requires some adaption.
It will also require time to make any changes to the reporting status quo. This is true even with the SEC’s statement that Chairman Paul Atkins and the SEC are “prioritizing this proposal to further eliminate unnecessary regulatory burdens on companies” at Trump’s request.
This is still the government we’re talking about. So even a prioritized proposal could take over a year to be adopted and implemented.
That’s why I spend so much time meeting with executives in person. Our Wide Moat Letter premier members have been catching some of these interviews lately.
If semi-annual reporting frees up two quarters a year, it gives us more bandwidth to double down on our research and deliver even better insights to our readers.
So whether quarterly reporting survives or Trump’s proposal gains traction, we’ll adapt. Either way, our goal remains the same: to protect readers’ capital and help spot the best opportunities ahead.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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