They say “one man's loss is another man's gain,” and this seems to have been proven true by recent economic data that exemplifies the trend of companies splurging on investors through share buybacks and dividends instead of making the required investments in their workforce.
Data from TrimTabs Investment Research, a leading independent institutional research firm, reveal that companies have spent over $290.7 billion in share buybacks year to date, but have remained overtly reluctant to hire more workers or make significant capital expenditures to boost the job market. Furthermore, S&P 500 companies have reportedly shelled out a record $37.5 billion as dividends so far this year.
Not denying the significance of companies boosting shareholder value, it is also imperative for the broader economy to have a healthy employment rate as much of the economic progress hinges on its labor market. Thus, with the unemployment rate languishing at 7.6%, is it worth prioritizing only private investors?
Is then the new monetary relation between investors and the labor market a prelude to the impending economic woes of the country that is slowly finding its feet after a prolonged downturn? Let's try to find a solution to this simple, yet in some ways complicated, algorithm.
The Cash Pile
Conservative estimates reveal that the cash balance of non-financial firms has currently swelled to $1.8 trillion, as most companies raked in huge profits in 2012. A sneak peek into the balance sheets of various companies reveals the stark reality:
At year-end 2012, oil behemoth Chevron Corporation (CVX - Analyst Report) had staggering cash and cash equivalents of $20.9 billion, while healthcare company Johnson & Johnson (JNJ - Analyst Report) and techno-giant Google Inc. had $14.9 billion and $14.8 billion in their respective kitties. To add to the list, consumer goods giant The Coca-Cola Company (KO - Analyst Report) had an astounding $8.4 billion of cash reserves as of Dec 31, 2012, followed by Kraft Foods Group, Inc. with $1.2 billion and Nucor Corporation (NUE - Analyst Report) and Union Pacific Corporation (UNP - Analyst Report) with $1.1 billion each.
A majority of these companies are gradually opening their wallets to investors and not to the labor force, which ironically may be the primary firepower behind the stellar growth in cash reserves. As a result, real wages are witnessing a downtrend and job additions have been few and far between.
According to data from business outsourcing solutions provider Automatic Data Processing, Inc. (ADP - Analyst Report) , private payrolls increased by a meager 135,000 in May 2013. Recent data from ISM Manufacturing and Non-Manufacturing indices also portray a grim outlook and anticipate relatively flat job growth.
Simple arithmetic, based on data from the Bureau of Labor Statistics, would reveal that the total money spent on share buybacks and dividends could have hired about 5.47 million new workers and sustained the average American worker cost of about $60,000 a year for salary and benefits.
So what made these companies renounce such a lucrative option to build the human capital and thereby contribute toward the broader improvement of the economy?
The Corporate Excuse
The recession has taught some very intricate survival strategies to companies, the primary one being stringent cost-cutting measures to increase corporate liquidities during challenging macroeconomic environments. However, among all the available options to reduce operating costs -- namely controlling inventory levels, curtailing employee expenses and delaying technology upgrades -- payroll costs are found to be the hardest to manage as companies often cannot easily retrench a large workforce.
As such, companies have largely stopped hiring new employees, which was once a routine affair to fill vacancies due to employee turnover. To make matters worse, a dramatic change in the labor market has unruffled the ergonomics and have tilted the equilibrium against hiring. As most Americans learnt the hard way of survival through the pangs of a prolonged recession, wages have declined and productivity has increased as a percentage of total product or service costs.
According to the U.S. Bureau of Labor Statistics, the non-farm business sector labor productivity increased at a 0.5% annual rate during the first quarter of 2013, while unit labor costs declined 4.3%.
The strategy of trimming costs also includes companies willing to pay lesser for employee’s healthcare benefits. According to the latest Milliman Medical Index (MMI), healthcare premiums are likely to increase 6.5% in 2013 as a family of four covered through a typical employer health plan will need to pay out $9,144 on an average. A larger employee base automatically increases a company's expenditures. Thus, most companies would prefer to reduce their healthcare cost burden by having a minimal labor force.
Reaping the Harvest
A significant chunk of these corporate savings and higher cash reserves are directed to the investors, as companies aim to further capitalize on some chart-busting performances by equity markets through confidence-building measures to further propel their stock prices. However, industry experts believe such astronomical gains of the stock market are indeed an aberration and are not sustainable, implying that the market is due for a correction.
Sir John Templeton once observed “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The equity market perhaps is currently passing through its stage of maturity and the euphoria is likely to wane sooner or later.
Consequently, it should be worthwhile for corporate organizations to start investing for long-term gains by developing the human capital through a strong labor force rather than rewarding investors for a short-term gain.