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Wall Street Job Cuts: Strategic or Whittling Away At a Dying Tree?

Jeff Bailey

This week, two financial giants announced major staff reductions, with Morgan Stanley (MS) planning to cut 1,600 jobs, or about 3% of its workforce, and American Express (AXP) planning a 5,400-employee reduction, close to 9% of its current 63,500 workforce.

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AXP Chart

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Investors have a kneejerk and positive reaction to layoffs at big companies, as seen in the American Express stock chart above, figuring lower costs mean higher profits (often) and that a management getting rid of workers must be better in touch with the business (maybe, sometimes). Given the national unemployment rate, it’s not a very nice sentiment (what goes around comes around), and if you’ve ever been at a large company doing some across-the-board layoffs (yes, twice), you know it’s often a half-assed process that can result in productive workers taking a buyout and quickly finding a job elsewhere and deadwood workers hunkering down and sticking around (negative selection).

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Outsiders can only guess, of course, and one might surmise from the scale of the two layoffs that American Express has the bigger problem to solve and Morgan Stanley is merely doing some fine-tuning. The guessing here, though, is exactly the opposite.

AXP Chart

American Express is cutting jobs in its global travel business, where more customers are interacting with the company online. That sounds more strategic and it said it expects to increase employment elsewhere during 2013 so that by year end the staff reduction of more like 4%-to-6%. As seen above, the company, coming out of the recession, has shown nice revenue growth and widened its profit margins. By the way, American Express is trading at a market-like PE ratio of about 14 and its dividend yield is about 1.3%. Though the yield is low, the dividend has grown 120% over the last decade.

Morgan Stanley’s recovery hasn’t been so robust, as seen below. The Wall Street Journal reports that the staff cuts will be aimed at senior people (can’t be too senior if there are 1,600 of them) in investment banking, back office, personnel and communications. Sounds more like a cost cutting move than a redeployment, though Wall Street firms certainly face a less profitable near-term as flat interest rates make bond trading dull and deal activity has been light.

MS Chart

Citigroup (NYSE:C) earlier announced 11,000 job cuts. With the economy stuck in slow-growth mode, don’t be surprised to see more giant companies turning to worker cuts as a way to prop up profit margins.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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