The Washington Post

What are CEOs doing with the highest profit margins in nearly 20 years?

Quick: When were the highest profit margins recorded in the last 18 years? Was it in 1999, amid the tech industry boom that minted so many new millionaires? Or during the years leading up to the financial crisis, when the business world was awash in easy money and the Dow Jones Industrial Average soared above 14,000?

The answer might surprise you. It will be this year. Bloomberg is reporting that corporate profit margins will climb to 8.9 percent in 2011, the highest level in at least 18 years, according to data Bloomberg examined on non-financial companies in the Standard & Poor’s 500 Index through March 11. Record earnings, combined with high levels of cost-cutting and dividend cuts amid the financial crisis, are helping to generate the sky-high margins.

So where do business leaders plan to spend that extra income? On shareholders, naturally. Of the 380 companies in the Standard & Poor’s 500-stock index that pay dividends, 378 are expected to maintain or increase them, according to Bloomberg data. They’re also buying back stock, which can help boost share prices: Bloomberg points to data from Birinyi Associates, reporting that in 2010 companies bought back $325.8 billion of stock, more than double the buybacks in 2009.

That’s all well and good--and expected, given the rate of dividend cuts during the crisis and the appropriate return of capital to investors. But if margins really are the highest recorded in 18 years, businesses are now running more efficiently than they have since the first year of Bill Clinton’s presidency.

One might expect, then, that there would be a little extra lying around for CEOs to do some things like, oh, invest in new projects and innovations that would lead to more hiring. While unemployment dipped below 9 percent in February for the first time in two years and there are signs the job market is rebounding, it’s still slow. According to the Wall Street Journal, the economy has been adding 136,000 jobs a month, on average. That’s just a little more than the 100,000 per month that’s needed to keep up with growth in the labor pool.

Despite the boost in profits--Bloomberg reports that S&P 500 profits will rise 16 percent this year--business leaders remain cautious. Until they’re sure the sales will be there, the argument goes, hiring is going to remain minimal. While some caution is understandable--especially amid rising oil prices and the unknown effects on the economy from the tragic earthquake in Japan--too much is not. At some point, leadership means taking risks and taking the lead on new ventures, new bets and new opportunities that are likely to lead to growth.

Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.


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