Evaluating 2024 Annual Reports
It is annual report season! If you own individual stocks, your mailbox may well be filling up with mailings from companies. I am a huge fan of annual reports. In today’s post, I want to review why annual reports are important, what makes for a good one, and how some firms have done this year.
Companies are required to send out information to investors each year. This includes notice of the annual meeting, proxy materials and a 10-K.
There is no requirement to produce a fancy annual report or include any additional information; company leaders decide what to do.
Why Annual Reports Matter
People debate annual reports. Some think the reports are a waste of money. Who cares? Most individual investors don’t vote and don’t matter. Big investors like mutual funds and family offices attend company presentations and can meet with executives one-on-one. Index funds don’t care about annual reports.
I have a different view. Annual reports are an important communication opportunity and a unique chance to build your company’s brand.
An annual report is an opportunity to communicate to investors, employees, political leaders, board members and partners. Reporting back to investors is simply a matter of respect. If you care about the people who own your company, you will keep them posted on how things are going.
Annual reports are particularly important for employees, both current and potential. People working at a firm should know the results and the strategic direction. An annual report is also a chance to celebrate employee contributions. A company is nothing without employees.
If you are leading a company, it is critical to tell your story. The annual report is a great way to do this.
Many of the great business leaders today are gifted at communicating. Warren Buffett writes long annual reports and holds festive gatherings in Omaha. He understands the value of communication and telling the story. Jamie Dimon, CEO of JP Morgan Chase, is a master of communication. You’ll see my assessment of his annual report below.
What an Annual Report Needs
Every annual report should address several topics.
1. Results! Investors can easily see the numbers, but the annual report is a chance for executives to provide some context. Should we be happy with these results? Disappointed?
2. Drivers. What led to the results? What worked and what didn’t? This is particularly important when the results aren’t good. What went wrong? The underlying question is whether the leadership team has earned the right to continue running the company.
3. Direction. It doesn’t make sense to include detailed plans in an annual report, since the competitors will of course read it. However, a company should lay out general priorities. What is the company working on? Where are the big investments? What are the risks?
Beyond these elements, companies can include other things.
-Employee recognition. Celebrating employees is critical – people want to be recognized and appreciated, and an annual report is a great opportunity to do this.
-Community engagement. People want to work for and invest in companies that make a positive impact. As a result, it is always good to highlight how a firm is making a positive impact on the community. Perhaps this is volunteer efforts or investments to improve the environment.
-Views on the world. Some executives use their annual report to provide thoughts on the broader environment. What are the important trends that might impact the company? What are potential regulations that might help or hurt the firm?
Evaluating the Reports
I invest small amounts in many different companies and in recent weeks I’ve received dozens of annual reports. Here is my assessment of a few.
One note: I’m evaluating what I received. A company might have a quality annual report on its website, but I’m not considering that for this exercise. I’m just looking at what came to me in the mailbox. Still, this is the only information I receive each year from firms, so it is fair to evaluate what they decided to send me.
Disappointments
Before getting started, I’d like to call out all the companies that don’t send anything at all beyond the required legal documents. Many went so far as to print everything on what feels like the thinnest paper in the world.
This is an insult to investors, partners and employees. It says the company just doesn’t care.
Among the disappointments this year.
Kraft Heinz: Proxy materials and a 10-K, printed on tissue thin paper.
Really? Kraft Heinz is a marketing company. One might think the company would value communication and telling its story. Apparently not. Over the past two years, Kraft Heinz has seen its stock fall from $41 to $28. It seems like a good moment to explain what is happening and discuss the outlook.
Verizon, Merck, Kimberly-Clark, Corning, Stryker, Baxter, WK Kellogg, Union Pacific: All of them, nothing. Please send something.
Two companies deserve special note.
First is healthcare firm Baxter. This company has delivered outrageously bad results, with the stock price on a steady decline from $87 in 2022 to its current $30. It would be great to have some message of hope, or at least a review of what happened.
Second is WK Kellogg. This new company, spun out recently from Kellogg, missed the opportunity to tell investors something about the firm. If ever there were a time for an informative annual report, this was it.
Something
Many firms send at least something: this might be a brief letter from the CEO discussing the year and the outlook. Let’s give these companies a C.
Waste Management: This company put a cover on the proxy materials and 10-K. So, the trash hauler at least showed a trash truck and an employee.
Integra: This biotech firm sent a 10-K and proxy materials, with a short letter from the CEO. The letter read well, but I couldn’t really figure out why the company was doing so poorly, with the stock price down from $75 to $12, and net income down from $181 million in 2022 to a loss of $7 million in 2024. Please explain what happened!
Good Ones
Many companies produce solid reports. The document is a quality discussion of the company, the results and the outlook. These reports build perceptions of the company. Clearly, the firm cares about telling its story. For these firms, a B+.
McDonald’s: A quality report! McDonald’s sent the 10-K with a cover and a nice letter from CEO Chris Kempczinski. The letter discussed results, priorities for the future and how the company is giving back, making headway on things like supplier diversity.
McDonald’s also printed the 10-K in color and on nice paper.
Kenvue: This is a new company, recently spun out from J&J. The company sent the 10-K with a quality cover and a three-page letter from CEO Thibaut Mongon. I think the company could have done more, especially since it is a new company with an unfamiliar name. But the letter was thorough and the overall presentation quite good.
Elanco: I have mixed feelings about this annual report. It is similar to the McDonald’s report, with good printing and a nice cover and letter.
I just couldn’t make sense of the commentary. CEO Jeff Simmons was very upbeat, noting “Having achieved six consecutive quarters of organic constant currency revenue growth, our innovation-driven strategy is working.” But Elanco’s stock price is down from $36 in 2021 to $11 today. Some explanation would be nice. Things don’t seem to be going well, so why all the optimism? I’m not saying that optimism isn’t warranted, I just don’t understand it given the results.
Southern Company: This utility sent out a high-quality annual report, with an informative letter from the CEO, charts and photos. I particularly liked the start: “2024 was another outstanding year for Southern Company.” This is right to the point.
Northrop Grumman: This defense firm sent a nice annual report, with a spectacular cover and then a series of graphs showing the excellent results. The letter from CEO Kathy Warden was brief but informative.
The Best
A few annual reports really stand out. These are super high-quality publications. The company clearly cares about communication, its investors, its employees and its partners.
The best annual reports are intelligent discussions of the company and the broader economy. There is a strong point of view.
The CEOs who create these reports look like thoughtful, responsible leaders. I would be happy to work for any of them.
Abbott: It is hard not to be impressed with Abbott after reviewing its annual report. The thirty-six page report is a thorough review of the Abbott business: the results and the strategy. The report reviews Abbott’s different business sectors, which is useful given the breadth of Abbott’s portfolio: Nutrition, Vascular, Neurmodulation, Medicines and all the rest. It is a quality, attractive report with photos, graphs and relevant information.
Textron: Like Abbott, Textron has a complex portfolio of businesses. The annual report is an elegant review of the different units: Aviation, Bell, Industrial, etc. The annual report starts with results, which is always a good way to begin. Then there is an informative letter from CEO Scott Donnelly. This isn’t the longest annual report but it communicates well.
M&T Bank: Buffalo-based M&T Bank sent a remarkable annual report. The thirty-two page document is an in-depth discussion of the business and the team, with commentary on broader trends such as the rapid growth of private credit. The cover features artwork from Ophelia M. Chambliss that represents connection.
The annual report sends the signal that M&T is a thoughtful, quality organization that values results and integrity.
State Street: Sometimes you read an annual report and are happy you own a piece of the company. That is the case for me with State Street, a Boston bank financial services giant. The annual report exudes quality: thick paper, brilliant colors. The letter from CEO Ronald O’Hanley is detailed and thoughtful. There is a review of the latest excellent results. And there is a theme: “It all starts with trust.”
I learned something, too: 11% of the world’s assets are entrusted to State Street. Amazing.
JP Morgan Chase: CEO Jamie Dimon is an exceptional business leader, and JP Morgan Chase creates an exceptional annual report. This is the top annual report I’ve received this year. It starts out with a blizzard of charts and graphs showing business results. This might be too much, but all the charts point up and to the right so there is a theme.
Dimon’s letter is then a thoughtful discussion of the business, the state of the world and leadership. I recommend everyone read it. The writing is crisp and the points spot on. Hard to argue with this one: “We need consistent and responsible tax and fiscal policies.”
We need more political leaders with this type of logical, honest and compassionate thinking.
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