These companies with underfunded pensions could drag down your portfolio, Morgan Stanley warns

Published Sun, Jul 12 20207:05 AM EDTUpdated Sun, Jul 12 202010:51 PM EDT

If a company is not meeting its pension obligations, it's probably not going to live up to shareholder expectations either. Morgan Stanley equity strategists created a list of 50 companies with the largest pension-fund shortfalls. "Our analysis shows that companies with pensions underfunded by > 5% of market cap significantly underperform the broader equity universe and sector peers," they concluded. The strategists estimate pension benefit obligations will rise 6% year-over-year when companies have to square up at year end. The coronavirus shutdowns had sent stock values into a nosedive, wreaking havoc on pension plans, but a swift market recovery has eased some of the pain. Pension funding has also suffered from a decline in interest rates during the pandemic. "We estimate the average funded status of pension plans is ~80% at 2Q20, compared to ~86% at the end of 2019," Morgan Stanley strategists wrote. "The 2nd quarter saw a rise funded status, riding on one of the best quarters for equities in last 40 years. The rebound in equity performance since market trough in late March has helped alleviate the stress felt by pension plans." Here are the Top 10 companies on Morgan Stanley's list ordered by underfunded pensions as a percentage of market capitalization. American Airlines — 84% General Electric — 39% Xerox — 38% Howmet Aerospace Inc. — 36% General Motors — 33% Delta Air Lines — 30% Ford — 29% Dow Inc. — 26% Corteva Inc. — 20% CenturyLink — Services 16% Many of the companies on Morgan Stanley's list have problems that go beyond their pension obligations, such as American Airlines and General Electric, which were in trouble before the pandemic hit. Also on the list, but not in Top 10, were struggling names such as Boeing, United Airlines, Exxon Mobil, to name a few. Like the pandemic itself, pension obligations could get better or worse, depending on the market as the year comes to a close. "The market volatility this year has raised continual questions from clients on the potential impact to funded status across a wide spectrum of scenarios," the strategists said.

An American Airlines seen at Ronald Reagan Washington National Airport during the coronavirus crisis.

Michael Brochstein | Barcroft Media | Getty Images

If a company is not meeting its pension obligations, it's probably not going to live up to shareholder expectations either.

Morgan Stanley equity strategists created a list of 50 companies with the largest pension-fund shortfalls. "Our analysis shows that companies with pensions underfunded by >5% of market cap significantly underperform the broader equity universe and sector peers," they concluded.

The strategists estimate pension benefit obligations will rise 6% year-over-year when companies have to square up at year end.

The coronavirus shutdowns had sent stock values into a nosedive, wreaking havoc on pension plans, but a swift market recovery has eased some of the pain. Pension funding has also suffered from a decline in interest rates during the pandemic.