Deep Dive
Opinion:
Companies are wasting money from layoffs on share buybacks
By
Philip
van Doorn
Published: Oct 25, 2015
11:17 a.m. ET
Dow Chemical, 3M and other companies might want to concentrate more on
boosting sales
![](MarketWatch%2020151025%20-%20Biogenx40.png)
Bloomberg News/Landov
Biogen said Wednesday it would eliminate 11%
of its workforce and invest the $250 million in savings in various
business projects. The biotech company spent $900 million in share
repurchases since Sept. 30. |
What do
you make of a company that announces restructuring moves that include
possible job cuts while it buys back shares?
For
starters, if a company whose stock you own continues to boost (or mitigate
the decline of) earnings per share (EPS) by buying back shares, while not
increasing sales, chances are the buybacks aren’t helping. The stock has
probably been declining in value, and EPS may not be growing. Maybe the
buybacks aren’t reducing the diluted share count by much because so many
new shares are being handed to executives.
That is
why it’s a good idea to pay attention to companies’ quarterly earnings
announcements, despite unctuous executives’ insistence on using so much
boiler-plate language when communicating with their companies’ owners.
Not all
buybacks are bad, and not all restructuring plans are bad. But a
combination of the two warrants extra scrutiny.
Here’s a
mixed bag of big companies’ restructuring announcements Wednesday and
Thursday:
-
Biogen Inc.
said it would
cut 11% of its workforce,
even though the company beat the consensus third-quarter earnings
estimate, increased sales by 11% and raised full-year earnings guidance.
Biogen plans to cut expenses by $250 million a year and reinvest the
money in various initiatives. Also on Wednesday, Biogen said that as of
Sept. 30, it had completed $3 billion of its $5 billion share-buyback
program, and had bought back another $900 million worth of shares since
Sept. 30. The average share count for the third quarter was down 1.8%
from a year earlier.
-
3M
Co.
will slash 1,500 positions worldwide and save an estimated $130 million
pre-tax next year. Third-quarter earnings per share were up 3.5% from a
year earlier,
but sales were down 5.2%
because foreign-currency translations reduced sales by 7.4%. The company
bought back $1.5 billion worth of shares in the quarter, and its average
share count declined 4.1% from a year earlier.
-
Dow
Chemical Co.
said it would continue a long series of restructuring moves in its
partnership investments in Kuwait and the U.S. Gulf Coast, and receive
$1.5 billion from a
reduction in its ownership of MEGlobal.
The company boosted its dividend by 10% and
accelerated its stock-buyback plan.
Dow’s adjusted operating earnings were up 15% from a year earlier to 82
cents a share. But sales slumped 16% to $12 billion, “driven by pricing
and currency.” The diluted share count inched up 5.6% from a year
earlier, reflecting the conversion of preferred shares into common
shares. Dow spun off Olin Corp. on Oct. 5. That deal reduced Dow’s share
count by about 34 million, completing $6.5 billion of a $9.5 billion
share-repurchase program.
-
Caterpillar Inc.’s
third-quarter earnings tumbled to $368 million, or 62 cents a share,
from $1 billion, or $1.63, a year earlier, as sales dropped 19% to $11
billion. The company expects
restructuring costs to total about $800 million
for 2015. The company said Sept. 24 that it will slim its workforce by
4,000 to 5,000 salaried employees by the end of 2016, with cuts of up to
10,000 by the end of 2018. Severance costs will ultimately total about
$2 billion. Caterpillar’s full-time headcount declined by 2,325 to
108,922 employees in the third quarter. The company bought back $1.5
billion in shares in those three months, leaving the share count down
4.5% from a year earlier.
-
Perrigo Co.
said it would cut its workforce by about 6%. The company didn’t provide
a specific number of jobs, though Perrigo had 7,550 employees at the end
of 2014. As part of its
strategy to fight off a takeover bid
by Mylan NV Perrigo said it would sell its vitamins business and buy
back $2 billion worth of shares. The over-the-counter and generic-drug
manufacturer said net sales soared 41%.
International Business Machines Corp.
didn’t announce any layoffs for last quarter, but said it bought back $1.5
billion worth of shares. Meanwhile, its stock dropped 10% in those three
months. Its own stock, alas, isn’t IBM’s best investment. Sales sank
13.9%, and operating earnings per share were down 9%, despite a 1.9%
reduction in the share count.
The bottom
line is that financial engineering could be a bad sign for an investor
looking to make money from a long-term investment.
You should
look beyond the headlines saying whether a company has “beaten” or
“missed” quarterly estimates for earnings per share. They mean nothing.
Any business or industry can have a bad quarter here and there, and it is
quite common for an accounting or other change to greatly affect EPS.
Sales
growth, or a lack thereof, can be a much better indicator of how a company
is faring.
Meat and potatoes
Here are
changes in third-quarter sales per share for the five companies listed
above as well as IBM:
Company
|
Ticker
|
Sales per share - most recent quarter
|
Sales per share - year earlier
|
Change in sales per share
|
Perrigo Co. PLC |
PRGO, +1.96%
|
$9.15 |
$7.08 |
29.3% |
Biogen Inc. |
BIIB, +0.06%
|
$11.94 |
$10.59 |
12.8% |
3M
Co. |
MMM, -0.13%
|
$12.22 |
$12.37 |
-1.2% |
International Business Machines Corp. |
IBM, +0.41%
|
$19.69 |
$22.45 |
-12.3% |
Caterpillar Inc. |
CAT, +1.23%
|
$18.43 |
$21.75 |
-15.3% |
Dow Chemical Co. |
DOW, +0.80%
|
$9.62 |
$12.17 |
-21.0% |
Sources: FactSet, company filings |
This shows
a stark difference in what each restructuring story might really mean for
investors. Yes, it’s sad to see so many people losing their jobs at
Perrigo and Biogen, but at least the companies are increasing sales. And
Biogen said it would use savings from the job cuts for new ventures.
If a
company is generating better sales and earnings growth, stock buybacks can
pay off nicely, since they boost EPS. Otherwise, this sort of “return of
capital” can be a complete waste to shareholders, since the stock price
may continue to slide.
IBM CEO
Ginni Rometty said that the company had “strong growth [of 27%] in our
strategic imperatives,” which include “cloud, analytics and engagement,”
during the third quarter. That’s great, but what about the legacy business
that’s dragging down revenue and profits?
If IBM
were to make a radical transformation and unload more legacy units, what
would it do with the cash? If it didn’t need the money to reinvest in its
“strategic imperatives,” maybe a higher quarterly dividend or a special
dividend would be much more friendly to shareholders. Yes, there might be
tax disadvantages, but at least investors would have the money in their
hands.
Here’s how
the six socks have fared:
Company
|
Total return - 12 months
|
Total return - 3 years
|
Total return - 5 years
|
Total return - 10 years
|
Perrigo Co. PLC |
4% |
33% |
144% |
1,163% |
Biogen Inc. |
-15% |
90% |
374% |
607% |
3M
Co. |
9% |
73% |
87% |
159% |
International Business Machines Corp. |
-11% |
-22% |
12% |
104% |
Caterpillar Inc. |
-25% |
-10% |
-1% |
82% |
Dow
Chemical Co. |
2% |
76% |
84% |
57% |
S&P
500 Index
|
6%
|
50%
|
90%
|
112%
|
Sources FactSet |
And here’s
how analysts view them:
Company
|
Closing price - Oct. 21
|
Consensus price target
|
Implied upside
|
Share of analysts with ‘buy’ ratings
|
Price/consensus 2016 EPS estimate
|
Perrigo Co. PLC |
$155.24 |
$198.80 |
28% |
33% |
17.4 |
Biogen Inc. |
$276.34 |
$372.18 |
35% |
65% |
15.1 |
3M
Co. |
$149.82 |
$156.73 |
5% |
41% |
17.5 |
International Business Machines Corp. |
$140.92 |
$148.90 |
6% |
21% |
9.3 |
Caterpillar Inc. |
$69.97 |
$70.32 |
1% |
19% |
18.1 |
Dow
Chemical Co. |
$47.48 |
$53.29 |
12% |
58% |
13.5 |
S&P
500 Index
|
|
|
|
|
15.9
|
Sources FactSet |
|
![](MarketWatch%20van%20Doornx15.png)
Philip
van Doorn
Philip van Doorn covers various investment and industry topics. He
has previously worked as a senior analyst at TheStreet.com. He also
has experience in community banking and as a credit analyst at the
Federal Home Loan Bank of New York.
|
This is an
interesting group of stocks because of all the moving parts, but even
sell-side analysts, who tend to have a sunny view when assigning ratings,
favor only Biogen and Dow Chemical.
The
important thing for an investor is to take a keen interest in what’s
really going on at a company. All companies try their best to paint a rosy
picture in their quarterly reports. A deeper look may tell you something
completely different.
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©2015 MarketWatch, Inc. |
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