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Tickers in this Article: DVN, NS, VLO, MSFT, IBM
Last week I wrote about companies who've laid off employees during this recession - despite generating substantial profits. I suggested that companies like Microsoft (Nasdaq:MSFT) and IBM (NYSE:IBM) might be good investments currently because they'll be lean and mean and ready to grow when the economy recovers some time later this year or in 2010. Today, I'll discuss the flip side. You see, there is strong evidence that my earlier hypothesis is bunk and that layoffs of any kind slows a company's recovery out of a recession. C-Suites take note.

IN PICTURES: Eight Ways To Survive A Market Downturn

The Evidence Is Strong
Writer, blogger and corporate strategist Bob Sutton suggests evidence exists that proves companies that refrain from job cuts bounce back from recessions far more quickly than those that bring out the pink slips. In the latest issue of Wharton Business School's online newsletter, it points out some of the flaws in the current trend to cut jobs. Peter Capelli, director of the Center for Human Resources at Wharton says, "Virtually all studies show a decline in performance associated with layoffs." He goes on to suggest that some of the poor performance is due to existing dysfunction within the companies themselves; nonetheless, reducing personnel will affect a company's ability to move ahead once the recession ends. Ultimately, if an organization cuts too deep, its core competencies will be compromised and in doing so, its future growth. (If you feel like there's a real chance you may get the ax, don't wait until a pink slip shows up on your desk before taking action, check out Top 6 Ways To Recession-Proof Your Job.)

No Job Losses
Fortune magazine's 2009 list of "Best Companies to Work For" includes nine that have never laid off employees. Not once. Two of those nine are publicly traded Devon Energy (NYSE:DVN) and NuStar Energy L.P. (NYSE:NS). It's not surprising to me that only 10% are listed companies. The drive to produce quarterly profits leaves management little choice but to make deep cuts - or, so they think. What's surprising here is that five of the nine are retail companies and two of them (Publix Super Markets, Nugget Markets) are low-margin grocery store chains. And, if they can do it, anyone can.

Excellent Cash Flow
Devon finished 2008 on a bit of a downer, booking a $7.1 billion non-cash after-tax charge to account for the decline in the value of its oil-and-gas assets. Otherwise, 2008 was a good year for the company. Excluding the fourth quarter charge, it had earnings per share of $9.91, 24% higher than 2007. Most importantly, it finished the year with cash flow near $10 billion, an all-time record for the oil-and-gas producer. It pays to have a flexible compensation system that saves cash when times are tough and spends it when times are good. Somebody at Devon should share this with the federal government.

Job Cuts Don't Work
NuStar believes job cuts are counterproductive because they reduce morale and decrease productivity. The San Antonio-based pipeline spinoff of refiner Valero Energy (NYSE:VLO), avoids layoffs by managing its costs and thus maintaining profits. It finished 2008 with $5.44 in distributable cash flow per limited partner unit, up 29% from $4.22 per unit in 2007. Despite the slowdown in the fourth quarter, management sees all three of its business segments doing well in 2009, especially if the economy improves. Either way, employees can rest easier.

Bottom Line
Investors sit at a crossroad: Are we to believe that job cuts are a necessary evil management imposes only as a last resort or are we sold a bill of goods from overpaid and underperforming executives who have little creative thought beyond what their next bonus check will look like? I think we all might know the answer to that question. (Financial downturns are part of the economic cycle and may have important long-term benefits, read more in Recession And Depression: They Aren't So Bad.)

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