American Express, Hurt by Junk Bonds, to Cut Jobs
American Express Co. said Wednesday that it will eliminate 4,000 to 5,000 jobs and take an $826-million pretax charge as junk bond losses reduced profit at the credit card company for a third consecutive quarter.
American Express, whose stock is the worst performer in the Dow Jones industrial average this year, also will take a third-quarter charge of $310 million to $370 million to cover expenses related to the job cuts. The company said second-quarter profit fell 76% from the year-earlier period.
Chief Executive Kenneth I. Chenault said the firm made a mistake by investing $3.5 billion in junk bonds and will pare its holdings of the lowest-rated securities to reduce risk.
American Express shares fell $1.28 to close at $37.50 in New York Stock Exchange trading. They are down 32% this year.
“It looks as if they are cleaning out that high-yield portfolio for good,” said Bruce Harting, an analyst at Lehman Bros. “The question will be ‘What is the growth rate of the underlying operations?’ ”
American Express has been relying on its card and travel services businesses to pull its asset management and financial planning unit through slumping capital markets. However, the company said card and travel services profit grew 3% in the second quarter, the smallest quarterly rise in at least four years.
The job cuts amount to about 5% of the company’s 88,850 employees. They are in addition to the 1,600 workers the company has already notified or fired this year.
The cuts will come in the technologies group, corporate travel business, human resources and overseas corporate lending operations. The company will shift finance and other functions to lower-cost offices overseas. Spokesman Michael O’Neill said hiring in other areas of the company will continue.
American Express said it will limit junk bonds to 7% of its $32-billion investment portfolio. The high-yield holdings, managed by Lorraine Hart, made up 11% of the portfolio, or about $3.5 billion, before Wednesday’s announcement.
Second-quarter net income excluding the losses from junk bonds will be $714 million, or 53 cents a share, American Express said. During the same period a year ago the company earned $740 million. The company’s American Express Financial Advisors arm made the high-yield investments with its own money, not that of customers.
Chenault said 2001 earnings per share won’t increase.
The New York-based company was expected to earn 53 cents a share, according to a First Call/Thomson Financial analyst survey. The company will report earnings next week.
