There’s an interesting article at NBC’s Dallas-Fort Worth affiliate to the effect that cutting jobs doesn’t boost a company’s stock price:
In normal times, investors generally react positively to layoffs, on the sentiment that personnel cuts are a critical way to resuscitate an underperforming company. But no longer, as firms that lay off thousands of workers are continuing to see their share prices plunge with little relief in sight.
“Under current circumstances the layoffs are seen as symptomatic of an economy that’s almost in freefall,” says David Resler, chief economist at Nomura Securities in New York. “It’s not appreciated as a streamlining tactic on an individual company…if the entire economy is going to be doing the same downsizing.”
The article goes on to point out that Caterpillar, Pfizer, and Dell all saw their stocks fall after announcing big layoffs. Here’s their interpretation of this phenomenon:
The takeaway seems to be that the companies announcing layoffs as well as the underlying economy both have too many troubles to be solved by cutting staff.
“What we’re seeing is the overall market keeps getting pounded and pounded by bad news,” says Rick Pendergraft, market analyst at Investors Daily Edge newsletter. “Individuals haven’t reached the point where they’ve become numb to that information.”
I don’t believe that’s right. Rather I think that management has misinterpreted their companies’ stocks rising after cutting payrolls. I think there are two different factors at work.
First, when all stocks are rising stock as they were in the late 1990’s, stock prices become completely disconnected from a company’s fundamentals. We saw that as price/earnings ratios came totally unglued. That’s certainly not the case now.
But, second, when sales are robust reducing payrolls means that profits will grow. When sales are weak reducing payrolls means that the companies will shrink and become less able to function. I believe that’s what’s happening.
In the present climate profits can’t be increased by liquidating the company (which is how I interpret layoffs), they can’t be increased with creative financing, and stock prices don’t rise on the tide of a bull market. Companies must innovate and produce products people will buy at the price at which they’re offered—managers must operate their companies according to the distinctive requirements of their industries.
That’s something I doubt the current crop of managers is able or willing to do.
I think the article is suspect in its analysis. CAT, and I believe many of the others, issued earnings reports downgrading expectations and projecting losses. The job layoffs were one of the things presented as mitigating, but not preventing losses. Certainly one would expect stock prices to go down when the company projects earnings will decline? The question is whether stock would go do down further if no job cuts were announced.
Also, CAT just announced 2,110 lay-offs, over half of which will be in Decatur. Since CAT is going forward with moving some of Decatur’s production to a new Arkansas plant, I suspect that these lay-offs are part of a Southern strategy.
I think the more relevant question is whether increased job cuts would have resulted in a higher stock price. My inclination is no. I think there’s a sort of Laffer curve on job cuts.. Up to a certain point it’s possible for judicious pruning of payrolls to result in a leaner, more efficient company. After that point you’re just demoralizing and, effectively, liquidating the company.
Still seems like it should depend. CAT has an inventory problem and they have to slow down or stop production. Are they going to give everyone paid vacations for a year? And part of the role of machines and computers on the assembly line is to devalue labor and make it replaceable.
Microsoft made its capital expenditures in creating a college campus atmosphere that seeks to enhance innovation and enhance the value of labor. I can see why you think the tech firms are cutting their own throats.
Still seems like it should depend. CAT has an inventory problem and they have to slow down or stop production. Are they going to give everyone paid vacations for a year? And part of the role of machines and computers on the assembly line is to devalue labor and make it replaceable.
Microsoft made its capital expenditures in creating a college campus atmosphere that seeks to enhance innovation and enhance the value of labor. I can see why you think the tech firms are cutting their own throats.
There are a lot of alternatives. Cut the dividend. Mandatory across-the-board pay cuts. Renegotiate union contracts along those lines. Cutting jobs, particularly under the circumstances, should be a last resort.
It’s the dividend they’re protecting. CAT stocks are down today because Goldman reported that CAT’s earnings expectations were rosy and in a worst case scenario pressure will be placed on the dividend. The job cuts might have been announced in response to that report.
I still think the article’s analysis is flawed, and I think your point is rather that companies should not be chasing day to day stock valuation. It’s the traders that are looking for a good place to “park money” during the recession that are looking narrowly at the dividend.
BTW/ it’s interesting that there is a huge stimulas package floating around that one would think would help the construction industry. CAT should be front and center being helped by the plan, but it’s not.