Innovation Inertia: Companies Laying Off Employees and Buying Back Shares May Get Worst of Both

Let's see: why don't we simply dispose of human and intellectual capital - arguably the future of the enterprise - in return for which we invest the savings in our own shares which have not been rising on their own since they are 'undervalued' by the 'unappreciative' market?

That way, we lose some admittedly costly assets but get the certainty of propping up our fading shares for a quarter or two versus the uncertainty of investing in the future. Sounds like a plan. In this economic climate anyway. JL

Phillip van Doorn reports in Marketwatch:

If a company boosts (or mitigates the decline of) earnings per share 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.

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. (BIIB)  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 bough 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. (MMM)  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. (DOW)  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. (OLN) 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 (CAT)  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. (PRGO)  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 (MYL), 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. (IBM) 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.