Companies Spending Cash on Investors, Not Workers

Companies remain reluctant to hire or make capital purchases and instead are choosing to reward investors over expanding their businesses. Companies have spent $290.7 billion this year on buybacks, aimed at decreasing the amount of available shares, thus driving up stock prices.

By: Jeff Cox
Published: Wednesday, 5 Jun 2013
CNBC

Companies flush with cash remain reluctant to hire or make capital purchases, choosing to reward investors rather than expand their businesses.

Recent economic data exemplify the trend: Private payrolls grew by just 135,000 during May, according to ADP, while employment components both for the Institute of Supply Management's manufacturing and nonmanufacturing indexes show a flat jobs outlook.

The grim hiring prospects come as nonfinancial firms hold nearly $1.8 trillion in cash on their balance sheets.

Rather than look to expand, though, they've chosen to participate in aggressive share buybacks and dividend increases to reward investors.

According to TrimTabs, companies have spent $290.7 billion this year on buybacks, which are aimed at decreasing the amount of available shares—or float—thus driving up stock prices.

That effort, at least, has been a success.

The Standard & Poor's 500 has gained more than 13 percent in 2013, led by big gains in financials and health care stocks.

Worried about growth prospects, S&P 500 companies have been passing out dividend payments with a free hand as well, rewarding shareholders with a record $37.5 billion thus far, rather than hiring. Using some very rough math—figuring an average American worker costs about $60,000 a year including salary and benefits, according to the Bureau of Labor Statistics—the total spent on buybacks and dividends could have hired 5.47 million workers.

When it comes to adding jobs, though, companies have been much stingier than they've been with giving back to investors.

The Federal Reserve's quantitative easing program, in which it buys $85 billion each month in Treasurys and mortgage-backed securities, is aimed at helping the central bank meet its dual mandate of price stability and maximum employment.

However, since the latest version, launched in November, the main accomplishment has been in boosting asset prices.

The unemployment rate since the program that some call QE Infinity has fallen from 7.9 percent to 7.5 percent.

But that has come as the labor force participation rate has shrunk to its lowest level since October 1978, which in itself cuts the jobless rate.

Total employment has grown just 302,000, or an average of a bit more than 50,000 per month. The total unemployment level has contracted 383,000, or just under 64,000 a month.

A dramatic drop in unit labor costs completes the picture.

The most recent figures released Wednesday show that bottom-line-focused companies lowered their worker costs by 4.3 percent while squeezing out still more productivity, which increased at a 0.5 percent clip.

The trend, then, does little to boost hopes that companies will start hiring or spending more on workers.

"Clearly the short-term health of labor market sentiment is insufficient to bolster the national employment numbers at this point," Andrew Wilkinson, chief market economist at Miller Tabak, said in a note. "We continue to feel the need to see improvements here before expecting to see bigger and better payroll readings in the second half of the year."

Economists at Capital Economics said the latest numbers suggest an economy growing at a 1.5 percent pace—likely a further disincentive for additional hiring.

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