The New Wall Street Playbook: Fire Workers and Raise Dividends

It has become increasingly common for Wall Street investors and activists to push companies to prioritize profits and stock prices over cost-cutting programs, while at the same time promoting shareholder returns.

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It is common for companies to announce layoffs in tandem with an increase in dividends, buybacks, or both at the same time, and that combination can make things awkward.

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The CEO of the Walt Disney Company, Bob Iger, made a commitment to cut $5.5 billion in costs back in his first earnings call after taking over the reins of the company. By the end of the year, he also expressed the company's hopes that the dividend would be reinstated by the company.

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As per a transcript provided by Sentieo, Iger said, "We will be able to achieve this through our cost-cutting initiatives.". The dividend will be modest initially, but we hope that this dividend will grow over time to become more significant. Among the cuts identified by the company were $3 billion in content-related cuts and another $2.5 billion in cuts to annualized non-content-related expenses. Christine Mary McCarthy, Disney's Chief Financial Officer, explained that 50% of these non-content cost savings would be achieved through marketing reductions, 20% of which would be achieved through technology, procurement, and other expense reductions, and 30% of them would be achieved through labor reductions. In order to address the challenges we are currently facing, Iger described the plan to cut 7,000 jobs as "necessary.".

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"I do not make this decision lightly," Iger said in an interview when asked about the job cuts. “It is with great respect and appreciation that I would like to express my gratitude for the talent and dedication of our employees worldwide, as well as the personal impact that these changes will have on me."

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As a result of the announcement, Disney's stock price initially soared, increasing as much as 9% in after-hours trading following the announcement. Nelson Peltz, who had been seeking a board seat through a proxy fight, also decided to drop the fight following the changes.

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"Now that we have Disney on board, all of our requests will be fulfilled," Peltz told Trade Algo on Thursday. “We would like to extend our very best wishes to Bob, this management team, and the entire board of directors. We will keep an eye on things. We will be rooting.”

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There were some who believed that it would be problematic to pair layoffs and dividends together.

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Considering Iger's history of savvy and sensitive handling of such topics, it does surprise me that he would announce both of these things at the same time, which seems to be a bit tone-deaf, according to Travis Howell, professor at the Paul Merage School of Business at the University of California, Irvine. “However, Peltz's pressure on him was so intense that perhaps he felt that this was a situation in which he felt he had to prioritize shareholders over other stakeholders due to the intense pressure he was under from Peltz."

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It has not yet been announced the amount of the dividend that will be paid by the company. There was no comment from a Disney spokesperson other than what was stated on the earnings call.

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Shortly before the dividend suspension was announced, Disney stock had a yield of 1.7%.

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As McCarthy, the company's chief financial officer said during the call that the dividend, which Disney has offered to its shareholders for more than 40 years, would be a “small fraction of our pre-COVID dividend with the intention to increase it over time as our earnings power grows.”

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The parent company of Facebook and Instagram, Meta Platforms, META –1.73% (META), announced earlier this month that it would lower its capital expenditure outlook for the year by about $4 billion and buy back an additional $40 billion worth of stock over time. There has been some speculation that Mark Zuckerberg, the CEO of Facebook, is planning to remove some layers of middle management and cut back on some projects. There have been 11,000 layoffs at the company since the fall of last year, or 13% of its entire workforce. A comment from the company was not returned.

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Earlier in November, HP HPQ +0.94% (HPQ) announced that it would be reducing its global headcount by between 4,000 and 6,000 employees. The company announced in the same press release that it would be increasing its dividend by 5% during the next fiscal year.

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There was no response from HP when we asked for a comment.

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Since Meta's earnings call on February 1st, the stock has risen by 16%. It has gained 1% since HP released its earnings report on November 22.

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Disney's cost cuts and dividend potential drew praise from Wall Street analysts on Thursday, but the stock couldn't hold its early gains. There was a 1.3% decline in shares on Thursday.