Despite Investors’ Initial Applause, Job Cuts Often Fail to Bolster Stocks
It’s a knee-jerk reaction. Practically every time a company announces job cuts, investors bid up the stock.
It peeves me no end.
Not only are job cuts callous and evidence of bad corporate planning, they aren’t even good for a stock’s performance over the following year or two.
Earlier this month I did a database search for news items in 1996 and 1997 about corporate job cuts. I was especially looking for ones in which the stock rose when the cuts were announced, although that wasn’t an absolute requirement. I ended up with a sample of 10 companies, including such well-known ones as Eastman Kodak Co., International Business Machines Corp. and Boeing Co.
I measured stock performance for these 10 stocks for various periods ranging from 11 months to 34 months. The start point for each stock was the end of the month when the news articles appeared (generally the same as the month the cuts were announced). The end point was Tuesday, Nov. 10.
Contrary to the popular myth, these stocks didn’t outperform the market. Seven of the 10 trailed the Standard & Poor’s 500. Four of the 10 showed absolute losses from the time of the job cuts to date--and don’t forget this was during a time when the stock market was rising smartly.
The average performance (capital gain or loss only, disregarding dividends) was a gain of 0.4% for the companies that had announced job cuts. The performance for the S&P; 500 (averaging together the various time periods) was 29.3%. So the job-cutting brigade underperformed the S&P; by 28.8 percentage points.
All this runs directly counter to what many investors suppose. People think that trimming the work force is a shrewd cost-cutting measure, that it shows toughness and resolve on the part of management, and that it indicates that executives are being “proactive” in dealing with a company’s problems.
Malarkey.
Yes, payroll is a significant cost. But job cuts have their own costs, not the least of which is morale. The people left on staff may be overworked (in which case the quality of their work will gradually deteriorate) or may lack crucial skills the departed workers possessed.
Toughness? Well, I don’t know how much toughness it takes to fire other people. Vision, foresight and the ability to inspire a work force seem to me more important.
As for being proactive, I think it’s much more impressive when a management team can plan ahead so that job cuts aren’t necessary. With good planning, any necessary trimming can usually be done through transfers, attrition and (if necessary) early-retirement incentives.
Job cuts are often part of a “restructuring” package. They may be coupled with closing of obsolete plants or branches, administrative overhauls, selling of non-core operations, and stock buybacks. When a stock does show a gain over the year or two following cuts, I believe it is often these other elements in the restructuring package that deserve the credit.
Of the 10 companies in my mini-study, the three that outperformed the S&P; were IBM, Kodak and Hayes Wheel International Inc. IBM cut a lot of costs besides payroll, made administrative changes aimed at being more responsive to customers, and bought back billions of dollars of its own stock.
Kodak’s job cuts were ironic because when George Fisher left Motorola Inc. in 1993 to take the helm at Kodak, the company had already gone through several rounds of dismissals and restructurings. “I think you resort to layoffs as a failure,” he said at the time.
In the case of Hayes Wheel, which outperformed the S&P; by only a smidgen, other factors besides job cuts certainly played a part. For example, the company had good success in marketing a lightweight aluminum wheel rim it developed.
The companies that performed worst among the 10 during the various periods I studied were Apria Healthcare Group Inc. (down 72%), Donna Karan International Inc. (down 39%) and International Paper Co. (down 18%).
To avoid being accused of stacking the deck, I deliberately excluded Sunbeam Corp. from my study. Sunbeam is the latest company to be run by Al “Chainsaw Al” Dunlap, a famous (or notorious, depending on your point of view) cost-cutter who habitually resorts to slashing jobs. True to form, he fired 11,000 people at Sunbeam in late 1996.
That company’s stock was down 71% from year-end 1996 to Nov. 10. It trailed the S&P; by 133 percentage points, since the S&P; rose 52% during that time.
But there are confounding variables in the Sunbeam story. The company became embroiled in an accounting controversy during 1998. Suffice it to say that a job-cutting strategy didn’t save Sunbeam, nor did all of Chainsaw Al’s vaunted toughness.
The other companies in my study, in addition to those mentioned above, were Keycorp, Bethlehem Steel Corp. and AMP Inc.
My sample size was too small, and my methodology too crude, to call my study a scientific sampling. Still, the results are powerfully suggestive.
I’m not saying I would never own a company that resorts to eliminating jobs. (Indeed, I own Boeing shares in my individual retirement account.) What I am saying is that investors should rid themselves of a knee-jerk tendency to react with pleasure and almost automatically bid up the stock price of any company that trims its work force.
Companies used to at least pretend to be embarrassed and apologetic when they let people go. Today, many CEOs all but pound their chests with pride as they jettison employees. To my way of thinking, this is one of the worst cultural changes of the last 20 years. There’s no need for investors to blindly encourage it.
John Dorfman is a Boston-based money manager with Dreman Value Management and writes regularly for Bloomberg News. His firm or its clients might own or trade investments discussed in his columns.
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Behind the Curve
Columnist John Dorfman reviewed the stock performance of major companies that announced layoffs in the last two years. Only three outperformed the S&P; 500 index of major U.S. companies between the end of the month of the layoff announcement and Nov. 16.
Company: IBM
Ticker symbol: IBM
Month of layoff: Nov. 97
Stock price at end of layoff month: $109.50
Nov. 16, 1998 close: $156.00
% change in S&P; 500, layoff month to Nov. 16: +42.47%
Difference between stock and S&P; 500* :
+24.35
*
Company: Kodak
Ticker symbol: EK
Month of layoff: Dec. 97
Stock price at end of layoff month: $60.65
Nov. 16, 1998 close: $78.56
% change in S&P; 500, layoff month to Nov. 16: +29.72%
Difference between stock and S&P; 500* : +13.43
*
Company: Hayes Wheel
Ticker symbol: HZ
Month of layoff: Jan. 97
Stock price at end of layoff month: $20.25
Nov. 16, 1998 close: $29.75
% change in S&P; 500, layoff month to Nov. 16: +46.91%
Difference between stock and S&P; 500* : +3.40
*
Company: Keycorp
Ticker symbol: KEY
Month of layoff: Nov. 98
Stock price at end of layoff month: $26.19
Nov. 16, 1998 close: $31.06
% change in S&P; 500, layoff month to Nov. 16: +18.61%
Difference between stock and S&P; 500* : -30.40
*
Company: Boeing
Ticker symbol: BA
Month of layoff: Dec. 97
Stock price at end of layoff month: $48.94
Nov. 16, 1998 close: $41.19
% change in S&P; 500, layoff month to Nov. 16: -15.84%
Difference between stock and S&P; 500* : -32.12
*
Company: Intl Paper
Ticker symbol: IP
Month of layoff: July 97
Stock price at end of layoff month: $56.13
Nov. 16, 1998 close: $45.94
% change in S&P; 500, layoff month to Nov. 16: -18.15%
Difference between stock and S&P; 500* : -36.39
*
Company: AMP
Ticker symbol: AMP
Month of layoff: Jan. 97
Stock price at end of layoff month: $40.75
Nov. 16, 1998 close: $43.00
% change in S&P; 500, layoff month to Nov. 16: +5.52%
Difference between stock and S&P; 500* : -37.99
*
Company: Bethlehem Steel
Ticker symbol: BS
Month of layoff: Dec. 96
Stock price at end of layoff month: $8.88
Nov. 16, 1998 close: $9.50
% change in S&P; 500, layoff month to Nov. 16: +7.04%
Difference between stock and S&P; 500* : -45.18
*
Company: Donna Karan
Ticker symbol: DK
Month of layoff: Nov. 97
Stock price at end of layoff month: $11.81
Nov. 16, 1998 close: $7.19
% change in S&P; 500, layoff month to Nov. 16: -39.15%
Difference between stock and S&P; 500* : -57.27
*
Company: Apria Healthcare
Ticker symbol: AHG
Month of layoff: Nov. 97
Stock price at end of layoff month: $15.75
Nov. 16, 1998 close: $4.31
% change in S&P; 500, layoff month to Nov. 16: -72.62%
Difference between stock and S&P; 500* : -90.73
*
* In percentage points
Source: John Dorfman
