Companies are cutting jobs and buying back stock at the same time
How would you feel if the company that just laid you off said it was spending millions of dollars, or even billions, to buy back its stock?
At least you wouldn’t feel lonely.
U.S. companies announced 205,759 job cuts during the third quarter, the most since the third quarter of 2009, just after the Great Recession, according to data provided by outplacement company Challenger, Gray & Christmas Inc. In September, the number of announced job cuts was nearly double what it was at the same time last year.
On Friday, the Labor Department released a stinker of a September jobs report.
At the same time, share repurchases announced by U.S. companies during the third quarter remains around the highest levels in at least the last decade, according to data provider Dealogic Ltd. In September, companies authorized buybacks totaling $243.4 billion, more than seven times the amount announced in the same month a year ago, Dealogic said.
One might think these corporate actions are mutually exclusive, but as the chart above shows, many companies are doing both. In fact, some companies have even announced job cuts and share buybacks in the same news release.
Hewlett-Packard Co. made the biggest job-cut announcement this year, according to Challenger, on Sept. 15, when it said it was laying off up to 30,000 people. In the same statement, it indicated it could spend $700 million on share repurchases in fiscal 2016. H-P declined to comment.
Late Thursday, Bebe Stores Inc. said in a statement that it will lay off over 50 employees, or nearly 2% of its workforce, to save about $4.8 million a year. In the next paragraph, Bebe said it authorized a $5 million share repurchase program, which at current prices represents nearly 6% of the shares outstanding. The women’s apparel and accessories retailer did not respond to a call for comment.
Industry expects said that often times, money used for stock buybacks comes from retained earnings—saved from the past—while layoffs reflect concerns about the future outlook for growth. When times are tough, however, it’s a different story.
“Whenever a company is laying off employees, something is not going the way it wanted it to,” said Dr. Michael McDonald, a professor at Fairfield University’s Dolan School of Business, in a phone interview with MarketWatch.
When a company is buying back stock and laying people off as its share price is falling, it could be viewed as “defensive” move, he said.
H-P’s stock has tumbled 35% year to date and Bebe’s has plunged 52%. That compares with a 5.2% slide in the S&P 500 index.
“It’s an effort to keep the stock price from falling too much. If the stock price keeps falling, it cuts off the company’s ability to raise capital in the future,” McDonald said. “Shareholders could be taking a little bit of solace that they are trying something.”
When H-P made its announcement after the Sept. 15 market close, the stock jumped 5% the next day, before falling for the next eight sessions. After Bebe’s announcement late Thursday, the stock surged and was up 7.5% on Friday, to close above the $1 mark for the first time since Sept. 24.