Profits are soaring> as jobs remain scarce. The nation's jobless rate, 9.6% as of Friday, has more than doubled in three years, with 7.4 million workers falling from payrolls. Meanwhile, profits this year for the large American firms that make up the S&P 500 index are expected to far exceed 2008 and 2009 profits and slightly exceed 2007 ones. Next year's haul is projected to set a new record.
That's not supposed to happen. Although layoffs can boost profits in the short term, downsizers tend to underperform non-downsizers in subsequent years on a variety of measures, including profit margins, return on equity and stock returns, according to Wayne Cascio, a University of Colorado professor who has published several studies on the matter. If not carried out cautiously, layoffs can have ill effects like lost sales, reduced innovation and low morale. (The bosses don't seem to suffer. Chief executives who slashed the most jobs last year took home 42% more compensation than average for S&P 500 companies, according to the Institute for Policy Studies, a left-leaning think tank.)
Some companies likely learned during past downturns how to reduce staff without cutting too deep. "Cisco laid off 20% of its workers after the tech wreck of 2000, but this time around is being far more careful," says Cascio. Other companies may feel the ill effects of their layoffs soon. "The key issue is time horizon," says Cascio. "If you're not growing revenues, and you're just cutting costs, it looks good in the short run but it will come back to haunt you."
Below are listed three companies that are increasing their sales and profits, and that have a history of avoiding layoffs, including during the recent recession.
2010 sales growth (projected): 15%
Southwest Airlines shares have multiplied 30 times in value over the past 30 years. That's a compounded annual growth rate of about 12% (not counting the company's miniscule dividends). Shares have fallen around 12% over the past five years, but they've sharply outperformed those of most U.S. airlines JetBlue shares have fallen by more than half in five years. Unlike Jet Blue and most of the legacy carriers, Southwest remained consistently profitable during a sharp travel downturn in recent years. In September, Southwest said it will buy discount carrier AirTran. The two companies use similar planes, and each serves 37 airports not covered by the other. Southwest hasn't had a layoff in its nearly 40-year history; it offered voluntary severance packages in May 2009. "We put our people before our customers and our shareholders," says a company spokesman. "We find that happy employees make for happy customers, and happy customers make for happy shareholders."
2010 sales growth (projected): 16%
Lincoln Electric, a welding equipment specialist founded in 1895 with $200 in start-up capital, today has operations in 19 countries and is expected to generate $1.9 billion in sales this year. Its U.S. company guarantees employment for workers with at least three years of continuous service and satisfactory performance. "The policy has been officially in place since the early 1950s," says a company spokesman. "We believe it was in practice way before then but there is no documentation." Lincoln remained profitable last year despite a 30% plunge in sales. Orders in the company's Latin American and Asian markets have been strong this year and a North American recovery began in the second quarter, according to investment bank Barrington Research, which covers the stock with an "outperform" recommendation.
Aflac provides supplemental health and life insurance and has narrowly focused plans covering accidents, specific diseases (e.g. cancer), hospital confinement and more. Almost all of its policies are bought at the workplace and paid for through payroll deductions. The company operates in Japan and the U.S., with Japan contributing about three-quarters of profits and the U.S. offering larger growth opportunities. It has avoided layoffs in both markets since the company's founding 55 years ago. "Job security enhances the productivity of your employees," Aflac's chief executive Dan Amos told the Atlanta Journal-Constitution in July. "You can t have your heart and soul in it if you re worried about your job." Shares carry a 2.2% dividend yield. In an August note to investors, John Nadel, who covers the stock for investment bank Sterne Agee with a "buy" recommendation, called the stock his favorite place to put new investment cash. He cited the stock's modest valuation (10 times forecast 2010 earnings), strong cash generation and limited sensitivity of earnings to swings in the stock market or interest rates.