Awash in cash

People who like dividend stocks might find that technology stocks are the type of stocks that they like.

For one thing, they have enough cash to buy several small European countries. “Companies have enough money to do whatever they want, and that’s before potential reparations” from the tax bill, noted Howard Silverblatt, senior index analyst for S&P Dow Jones Indexes. And how. All told, about $1.8 trillion is cooling its heels on corporate balance sheets, and much of that is on tech balance sheets. Here are the 10 companies with the biggest cash stashes:

Apple has another $195 billion in “long term investments” on its balance sheet, which skeptics might label as “pretty darn close to cash.”  And overall, IT is the second-largest dividend payer, behind financials.

Why does IT have so much cash, aside from being immensely profitable? One reason might be that IT went through a near-death experience in 2000-2002, and they have learned the lesson that cash is your best friend in hard times. (Banks, which have gone through several near-death in the past 50 years, never seem to learn that).

Another is that IT companies rely on innovation to survive, and innovation doesn’t come cheap. Either you have to hire top people (and pay them well to keep them) or you have to pay up to buy innovative companies. That requires cash, too, although having an extravagantly valued stock price is good, too.

What’s interesting is that many of these stocks aren’t insanely priced. Apple sells for 14.4 times its estimated 12 months’ earnings, and pays a 1.45% dividend, too. Cisco sells for 14.4 times earnings and pays a 3.0% dividend. Oracle pays a 1.48% dividend and sells for 15.3 times earnings. Only Facebook, which sells at 26.8 times its expected earnings (and doesn’t pay no stinking dividend) fits the profile of the gunslinging tech company of yore.

(The two biotech companies in the chart, Amgen and Gilead, also rely on heaps of cash to continue innovation, are cheap, and pay good dividends. Coca-Cola is, well, Coca-Cola).

During the 2007-2009 bear market, and for some time thereafter, technology was the sector with the highest dividends, precisely because it had the cash on hand to do so. Banks were too busy staving off bankruptcy. For investors who like dividends and dislike bankruptcy, large-cap IT seems to be a reasonable bet.

Naturally, there’s an ETF for that: The First Trust NASDAQ Technology Dividend Index Fund (TDIV), which currently yields 2.14% on a trailing basis. The fund doesn’t have the sizzling returns that an all-tech fund has — it’s up a mere 21% this year, vs. 36% for the technology sector — but that’s not why you buy a dividend fund. Assuming these companies don’t waste their money on something foolish, like buying several European countries, they could be a good long-term investment for dividend investors.

Provide, provide

Sooner or later, the nation’s eye will turn to Social Security. Advocates of reducing benefits say, “We can’t afford it.” The question then becomes “Can afford it?”

The average monthly Social Security benefit is $1,348, or $16,176 a year. That’s not much, and Social Security was never meant to be a full-blown pension. On the other hand, Social Security is a vital part of most retirees’ lives.

Ida May Fuller, first recipient of Social Security.

According to the government, 48% of married couples and 71% of unmarried persons receive half or more of their income from Social Security.  Twenty-one percent of married couples and 43% of unmarried people rely on Social Security for 90% or more of their income.

Social Security has two features that are particularly important to retirees. First, it’s a guaranteed lifetime income. Your Social Security payments last as long as you do.

Second, Social Security payments are protected against inflation, which is the enemy of anyone who lives on a fixed income. The effects of inflation are cumulative: After 10 years of 3% inflation, a $1,348 payment has the buying power of $10,148 – a 24% decline.

If the nation no longer wants to fully support Social Security in its present form, you will have to make up the slack. And it’s not cheap.

How much money would you need to replace the average Social Security payout? We can get a rough indication from the annuity industry. When you buy a basic immediate annuity, you get an insurance company’s guarantee of income for life, just as you do from Social Security. An immediate annuity is a bet with the insurance company. If you get hit by the 9:15 southbound Cannonball Express a week after you buy the annuity, the insurance company keeps your money and you lose. If you live to 115 while smoking cigars and drinking whiskey, the insurance company pays out more than you invested, and you win.

Most annuities aren’t adjusted for inflation. The Vanguard Group does offer an annuity whose payout raises 3% a year – roughly the inflation rate since 1926. To get a monthly starting payout of $1,300, here’s what a person born in Pennsylvania on 3/8/1952 would need:

 

Female life only $256,960.37
Female life only with 2% graded payment $317,264.07
Female life only with 3% graded payment $355,450.39
Male life only $240,346.76
Male life only with 2% graded payment $293,254.43
Male life only with 3% graded payment $326,409.49

Male policies are cheaper because we die earlier than women. It’s just the way it is.

Bear in mind that Social Security offers other benefits, such as disability payments and payments to surviving family members.

The bottom line: Let’s say you were counting on an income of $50,000 in retirement, and that $16,000 of that was from Social Security. Conventional wisdom says that you can only safely withdraw 5% of your investment kitty each year if you want to adjust your payout for inflation. To get $34,000 a year in investment income, then, you’d need $680,000. To make up for the loss of Social Security, you’d have to add another $326,000 to $355,000.

No one is talking seriously about abolishing Social Security – which, as a reminder, has its own stream of tax revenue for funding. But every reduction in benefits means that you have to make up for it. Provide, provide!

They don’t ring a bell

According to hoary Wall Street lore, they don’t ring a bell when a bull market ends or a bear market begins. (Those would actually be the same thing). But Federal Reserve Chair Janet Yellen did all but that today when she spoke at the Kansas City Fed’s economic conference in Jackson Hole, Wyoming.

“I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said, which is just about as close to skywriting “RATES ARE GOING UP!” as a Fed chair can get. Wall Street, which has anticipating higher rates since 2009, reacted predictably, selling off stocks and bonds at the same time. The Dow Jones industrial average fell 53.01 points, to 18,395.40, and the bellwether 10-year Treasury note yield rose to 1.635%. Bond prices fall when interest rates rise, and vice-versa.

Naturally, the case for raising interest rates soon is debatable. In terms of timing, the Fed is traditionally reluctant to raise rates in the months before a presidential election. If that reasoning still holds, the next opportunity to increase the key fed funds rate would be in December.

And on a relative basis, interest rates are pretty high already. The fed funds rate is 0.25% to 0.50%. The European Central Bank’s rate is zero, as is the Bank of Japan’s. The Swedish central bank’s rate is -0.25%, and the Swiss government rate is -0.75%.

The Fed doesn’t control long-term interest rates, but the picture there is just as grim. Germany’s 10-year yield is -0.07%. France’s decade note yields 0.17%, albeit with a certain je ne sais quois. Italy’s 10-year rate — Italy’s! — is 1.17%.

What is starting to make the Fed uneasy, however, is rising wages. The Fed has been able to flood the world with easy money for nearly a decade without fear of a wage-price spiral because wages have been flat for more than a decade. You just can’t have a wage-price spiral without higher wages.

Oddly — and somehow justifiably — those at the lowest end of the wage spectrum have been seeing the biggest wage increases, thanks in large part to state-mandated minimum-wage increases. But that’s not the only reason. Many companies, such as Walmart and McDonald’s, have come to the realization that they rely heavily on those who face the public. Those people are almost invariably on the lower end of the wage spectrum.

Perhaps Lily will get a raise.
Perhaps Lily will get a raise.

Service companies are also discovering, to no one’s surprise than theirs, that people who don’t make much don’t feel a lot of loyalty to their employers. Low-wage employees will often gladly jump ship to another company that pays better wages. In the recession, companies could simply say, “Be glad you have a job.” But many of the new job gains have gone to low-income employees — so much so, in fact, that there’s a relative shortage of people willing to take low-wage jobs.

“Wage acceleration has been concentrated in low-pay sectors, such as restaurants and retailing,” says Bank of America Merrill Lynch. “In our view, the increase in low-pay wages is due to state-level minimum wage increases and a shortage of younger, less-educated workers. We see sharp increases only in low wage sectors: broader wages should rise more gradually as joblessness falls.”

The Fed raises interest rates to slow the economy and reduce the threat of inflation. But bear in mind that interest-rate increases take a long time — 18 months or so — to fully take effect on the economy. Furthermore, a more or less normal fed funds rate, which is neither accommodative nor restrictive — is somewhere between 3% and 4%. It will take many more quarter-percent rate hikes to get back to normal.

The big danger is that the economy isn’t exactly boiling over. Current estimates for third-quarter gross domestic product are a 1% increase or less.

If you’re looking for a rate shock, you probably won’t see one any time soon. You may start to see better rates on bank CDs: The top ones now yield about 1%, according to Bankrate.com. But you should start to be wary of interest-rate sensitive stocks, such as utilities and preferred stocks. And if you’re thinking of loading up on bonds, you might want to wait a bit.

 

 

 

 

Greetings from Lacunaville

SDSC_0368tarting in January, I’ve been writing full-time for InvestmentNews, doing a monthly column for Money magazine, and studying for the Certified Financial Planner mark. (This, apparently, is also a test of your prowess with a hand-held calculator). And I went to Africa.

The blog, as you may have noticed, has, um, languished. I’m hoping to revive it on a somewhat irregular basis, which, come to think of it, is pretty much its usual schedule.

I’ll be updating my links pages in the next week or so. In the meantime, here are some things to watch for today, as well as some things I’ve found interesting or peculiar.

This week, all eyes are on the Bureau of Labor Statistics’ employment situation report, out at 8:30 a.m. Friday. But the stock market seems to be resigning itself to an interest rate hike, probably in June or July. (A later hike would give the impression of a political motivation, and the Fed generally doesn’t like to do that). The current consensus estimate for new nonfarm jobs is 158,000, according to Bloomberg, with the unemployment rate falling to 5%. (And, yes, the total unemployment rate is still high, but it’s the nonfarm payrolls number that Wall Street watches.)

Wages also seem to be firming up, and it should be interesting to see if traditional summer employers, such as ice cream vendors and lawn mowers, have a hard time finding help this year. All of these would seem to give the green light to the Fed to raise rates.

Of course, we’d be talking about a lordly fed funds rate of 0.5% to 0.75% after a Fed hike, an increase that will be promptly reflected in your credit card bill and eventually in your money market mutual fund account. For those who still watch their money fund account, the average money fund now yields 0.10%, nearly triple its rate at the start of the year.

DSC_0353The stock market typically dislikes interest-rate hikes. Higher rates mean bonds become more competitive with stocks, and increase short-term borrowing rates. On the other hand, higher short-term rates mean that companies will earn somewhat more on their cash, and that savers will earn slightly more on their cash.

The old adage about Fed rate hikes — three steps and a stumble — meant that the stock market takes the first two hikes as a sign that the economy is improving, and rallies. At the third hike, stock investors realize the Fed wants the economy to slow, and stocks sell off. Bear in mind that the adage originated when a normal fed funds rate was 4% to 5%. It would take a stairway, not a few steps, to get us back to the traditional stumble level, assuming the Fed raises rates at a quarter-point a pop.

I’m an optimist, and think that rising earnings are a good thing — in fact, the one thing that the economy desperately needs for sustained growth. Most companies, despite their complaining, have nice profit margins, good balance sheets, and plenty of cash. They might even be surprised to learn that when their employees get raises, they spend more — and even on the products their employers sell.

DSC_0488The one caveat: Stocks aren’t cheap, at least by the price-to-earnings ratio of the Standard and Poor’s 500 stock index. The current PE, based on forward earnings estimates, is 17 — a tad feverish, although nothing like the levels during the technology bubble. Nevertheless, at these levels, it’s a bit like driving a bit too fast on old tires. If the market takes a rate hike really badly, investors could find that both bond and stocks slide off the road. And in that case, having a bit of cash in a money fund might be a good safeguard.

 

Help wanted

You go to your favorite restaurant, only to find that there’s one harried waitress serving 10 tables. Or you take your car into the shop, only to be told that it will take two days to replace the cracked infindibulum because they’re short-handed. Or you arrive two hours early for your flight, only to see a line snaking around the ticket counter and the two employees trying to deal with hundreds of angry passengers.

Lucy and Ethyl wrap chocolates.
Lucy and Ethyl wrap chocolates.

One of the more annoying features of modern life is dealing with companies that simply don’t have enough help. Ever since the Great Recession began in 2007, companies have been pushing workers to work longer and harder, no longer aiming for just-in-time staffing but for just-before-death staffing. And this has helped keep corporate earnings break records year after year since 2009.

But there are some signs that skimping on staff is starting to hurt business as the unemployment rate kisses 5%. Just this morning, the National Federation of Independent Business released its Small Business Optimism index for October, which was unchanged at relatively modest levels from September.

The biggest complaint in the survey was government red tape and taxes, but that’s always the biggest complaint in the survey. More interesting: 55% said they hired or wanted to hire new workers, but 48% said they couldn’t find qualified applicants. When you can’t find qualified applicants, that often means you aren’t paying enough. Most people have a good idea of what their skills are worth.

In October, 21% of small business owners said they raised wages, although that was down two percentage points from September. Sooner or later, however, they will probably have to be more aggressive about raising wages to attract the help they need — or they will become that business that used to be really good and efficient, but just can’t seem to keep up any more.

Some companies are already raising wages, albeit reluctantly. Walmart has launched a new ad campaign touting the increased spending on wages it plans, bringing workers to the princely sum of $9 an hour this year and $10 the next. “A raise in pay raises us all,” the spokesman intones. The company has long been criticized for its low pay.

For investors, higher wage demands may well mean a short-term decrease in earnings, particularly for small-company stocks. On the other hand, money you pay to workers is excluded from taxes. And sooner or later, those workers will have more money to spend at other small (and large) companies. Perhaps a raise in pay does raise us all.

 

On the road

As we start the summer driving season, it’s a good time to reflect on the fact that the average U.S. passenger vehicle is a record 11.4 years old, according to Polk.

Part of this is because most cars really are better these days: You can go 100,000 miles without changing spark plugs, and hitting the 100,000 mile mark is now more a sign of middle age rather than utter decrepitude. And if you’re in a major city, you can get by with taxis, Uber and Zipcars.

The other part reason the U.S. auto fleet is so old is that many people still don’t feel secure enough in their jobs to make a major purchase like a new car. Nor do they earn enough. The median family income is about $50,000; a modest new car will set you back $15,000 to $25,000.

President Coolidge shows off his radio-equipped auto.
President Coolidge shows off his radio-equipped auto.

And it’s not entirely the auto industry’s fault that cars are so expensive. In 1970, a Volkwagen Beetle cost $1,874. Adjusted for inflation, that’s $11,427 today. And current starter autos have nice touches like air bags and heat.

Nevertheless, it’s a reasonable bet that car sales will accelerate a bit in coming months, assuming the unemployment rate remains steady and wages tick up a bit. And that, in turn, could be good news for auto stocks. So far this year, automakers are up 8.49%, vs. 3.23% for the Standard and Poor’s 500 stock index. Toyota has gained 9.89% this year, Honda’s up 15.92% and Volkswagen has gained 16%.

The laggards are U.S. automakers. Ford has fallen 0.19% this year, and GM is up 3.9%. Both are dead cheap stocks, however: GM trades for 6.6 times estimated 2015 earnings, and Ford clocks in at 7.6 times earnings. American cars, by and large, are sturdy and well priced. They might finally start to accelerate later in the year, if the economy doesn’t sputter too badly.