By John Byczkowski
The Cincinnati Enquirer

George Schaefer, president of Fifth Third Bank, talks with customer service representatives at the downtown office. They are Angela Rogers (left), Marlene Schum and M. Beth Jones. The Cincinnati Enquirer/MICHAEL E. KEATING

Greater Cincinnati's public companies pulled down nearly $12 billion in profits last year, more than double what they earned in 2002.

But it wasn't easy, and it wasn't for the squeamish.

An Enquirer analysis of corporate profits locally shows many companies in 2003 bounced back from horrible years. In 2002, 16 of 40 local companies lost money. In 2003, nine of those swung to a profit and another 27 saw earnings improve.

How will companies invest their new riches? Many won't, economists say.

"Right now they're sitting on it," said Gus Faucher, senior economist for Economy.com in West Chester, Pa. "They're waiting to make sure the recovery is fully in place for them start to hire, before they start investing."

Instead, companies are helping their shareholders - buying back stock, raising dividends and paying down debt. "They're not hiring," said Scott Rodes, director of equity research at Bahl & Gaynor in Cincinnati. "I don't think they're finding a lot of opportunities that generate a high return on investment capital."

Recession recovery

INFOGRAPHIC

• Comparing locally based public companies

Nationally, profits grew by 32 percent in 2003, and Cincinnati companies fit that trend. Little of that improvement came from economic growth. Nearly two thirds of that gain nationally came as a result of cost-cutting and productivity improvements, according to investment bank Goldman Sachs. Most of the rest came from low interest rates, lower taxes and a weaker U.S. dollar.

Many local companies are still licking their wounds from the recession. In 2002, Cincinnati Bell took a $4 billion loss as it wrote off its investment in a broadband network. Then last year it gained more than $800 million on tax loss carry-forwards. That's a $5 billion swing in net income in one year, almost none of it coming from its core communications business.

Cintas Corp.'s profits grew just 7 percent during 2003. Weak job growth didn't help the Mason-based company's profits, Rodes said.

Cintas, which rents uniforms to companies, makes most of its profits on the next worker those companies hire. If a company has 20 employees, "there's very little incremental cost (to Cintas) going from 20 to 21, but if you go from 21 down to 20, you're losing a lot of money there," Rodes said. And right now, Cintas' average corporate customer isn't hiring, he said.

How Fifth Third grew

Fifth Third Bancorp - the region's most profitable public company year in and year out - grew despite an economy that worked against it.

Fifth Third is more than 10 times larger than when George Schaefer became CEO in 1990. The bank has grown by buying smaller banks across the Midwest and aggressively selling its products.

Last year, however, a federal investigation into accounting irregularities meant Fifth Third was barred from making acquisitions. Low interest rates made it hard to make money on loans, and continued high joblessness meant little growth in household incomes.

To improve profits in 2003, Fifth Third would have to bear down on the basics.

"Get cheap deposits, get fees, get good-quality loans and then cut expenses. Do it faster, then do it over. Everybody in the place knows that's the deal." Schaefer said.

"We're making more loans at our Hyde Park office, we're taking more deposits at our Sharonville office," Schaefer said. Doing that across its network of 960 branches allowed Fifth Third to grow by $10 billion in assets and increase profits by 7 percent.

And it remained highly profitable: For every $1 in revenue, the bank kept 27 cents of profit, nearly double its nearest local rival on the list, E.W. Scripps. Co.

Schaefer said he's happy with that, but the picture would be brighter if the economy were better. Higher interest rates would make it easier to profit on the difference in rates on loans and deposits, and lower joblessness would mean higher incomes, more deposits and more loans. "The bank just mirrors what's going on in the economy," he said.

And the economy mirrors what's going on in business. Job growth is weak in part because companies aren't investing in expansion, electing instead to raise their dividends, buy back stock and pay down debt.

The dividend indicator

Of 25 Cincinnati companies that pay a stock dividend, 14 raised them last year. P&G usually raises its dividend every four quarters but announced in March it was raising the dividend just nine months after its previous increase.

And two more companies - Federated Department Stores and Pomeroy IT Solutions - paid dividends for the first time.

Federated has suffered through expensive mistakes and weak sales growth, but last year felt confident enough in its cash flow to begin paying a 12.5-cent quarterly dividend and devote $645 million to buying back its stock.

Why not put more money into its stores? The company spends about $700 million a year building and renovating stores, and spokesperson Carol Sanger said that's an appropriate level.

"When the stock price is as low as it's been, it's a more prudent use (of profits) to repurchase shares and drive up the value of shareholder equity," she said.

A few local companies, however, show that businesses are willing to invest in expansion when given a reason. Scripps is pouring profits back into its successful cable Food Network and HGTV.

Multi-Color Corp., which prints labels for consumer products, is in a self-described growth mode, said CFO Dawn Bertsche. "We are adding workers quite a bit," she said. "We really are choosing to expand because we're finding a lot of opportunities in the marketplace for us and in the space we compete in. We want to continue to take advantage of those opportunities."

It would be good for the economy if more companies thought like Multi-Color, economist Faucher said. He said business investment is starting to pick up, but if the economy is to continue to expand, more Americans need to find jobs.

"It all depends on jobs," he said. "We expect job growth to pick up and accelerate through the rest of this year. By the second half of the year we expect the recovery to be self-sustaining."

"If that doesn't happen, then we could be in trouble. Businesses have been reluctant to hire."

E-mail johnb@enquirer.com