When the economy imploded in December 2007, corporate America’s playbook called for scaling back expenses and stacking up cash.
More than 7.6 million jobs vanished during the downturn, including 232,112 in metro Atlanta, Bureau of Labor Statistics figures show. The job cuts, coupled with tighter reins on other expenses, helped big businesses across a host of sectors return to profitability.
But that profitability still hasn’t resulted in any meaningful job creation in a national economy with a 9.6 percent unemployment rate. In fact, companies including Home Depot, Aflac, Flowers Foods, Gap, Radio Shack and Hewlett-Packard are focused on buying back their own shares or making strategic acquisitions.
And they have the cash to do it. Hewlett-Packard, which had $14.7 billion in cash at the end of the last quarter, said last month it would repurchase $10 billion of its shares. At the start of this year, Home Depot said it planned to buy back $3 billion of its shares by the end of this year.
The home improvement giant also raised its dividend 5 percent — the first increase since the third quarter of 2006. The move, company chief executive Frank Blake said in a conference call with analysts, reinforces “our confidence in the business and our commitment to our shareholders. And it is our intent to continue to increase our dividend every year.”
Collectively, American corporations are sitting on $1.1 trillion in cash, according to Atlanta investment advisory firm Balentine. The figure, the highest in 40 years, represents 10 to 15 percent of total market capitalization and swells to $3.2 trillion when financial institutions are included.
So why are companies focused on share buybacks rather than deploying that cash into new projects that could translate into new jobs?
“It’s a reflection of exactly what’s going on in the economy. Share buyback activity does offer a real-time glimpse as to whether the recovery in 2009 will turn into a durable expansion,” said Adrian Cronje, partner and chief investment officer at Balentine.
“It is a worrying sign that corporate treasurers are choosing to buy back stock rather than using cash to hire, or invest in new projects. We’re not suffering from a shortage of cash, we’re suffering from a shortage of confidence.”
They aren’t investing in new projects because of the massive health care and financial regulation legislation enacted this year in Washington, as well as the uncertainty about what corporate tax rates will be next year, he and other analysts said.
The return to profitability for most companies hasn’t necessarily been reflected in the broader stock market, which is another reason for the uptick in buybacks, said Charles E. Osborne, managing director of Iron Capital Advisors in Atlanta.
“The market hasn’t gone anywhere in the last 10 months and corporate earnings keep improving and the companies are looking at their stocks and saying these are good values,” Osborne said. “The lack of investor interest in the market has to do with macroeconomic news; it’s the crisis in Europe and the increasing deficit concerns here in the U.S.”
Even firms such as Atlanta-based Genuine Parts Co., which have had long-established share-repurchase plans, pulled back purchase volumes in light of the recession. They’ve since come back a bit.
Genuine Parts, parent to the NAPA auto parts chain, repurchased 5 million shares in 2007 and 7 million in 2008, said Sid Jones, the company’s vice president of investor relations. That was up from the 3 million shares Genuine Parts repurchased in 2005 and 2006.
But last year was different.
“We scaled back the buyback activity during 2009 in an effort to conserve cash in such uncertain economic times,” Jones said. “In 2009, we bought only 722,000 shares, mostly in the fourth quarter, when we felt more certain about an economic recovery. To date this year, we have repurchases approximately 1.7 million shares.”
Aflac, the supplemental insurer, suspended its share repurchase plan it the fourth quarter of 2008.
“We felt it was best to retain capital, because of the uncertainties around the globe,” said Kenneth S. Janke Jr., Aflac’s senior vice president of investor relations.
The company didn’t buy any of its shares last year, either, but said this year it would resume the program in the fourth quarter of this year with the board authorizing the repurchasing of up to 3 million shares. It also said it plans to raise its dividend payout by two cents in the fourth quarter.
Next year, the plan is to repurchase between 6 million and 12 million shares, Janke said.
“We still have an eye focused on the retention of capital. We’re trying to balance our posture of being conservative but we need to make sure that we have a capital buffer,” he said. “We want to balance that view of being cautious with the view of benefiting our shareholders.”