Investing Insights: Christine Benz Interviews Jack Bogle, Netflix Earnings, and More

[Music] welcome to the investing insights podcast from morningstar.com this podcast is brought to you by Oppenheimer funds Oppenheimer funds has nearly 50 years of experience investing beyond borders to find tomorrow's opportunities find out more at Oppenheimer funds calm slash global this week on the podcast highlights from Christine Benzes interview with Vanguard founder Jack Bogle earnings results from Johnson & Johnson Netflix and IBM three ETFs for dividend seekers and opportunities and electric vehicles let's get started here's Christine Benz with Vanguard founder Jack Bogle hi I'm Christine Benz for Morningstar calm I'm at Vanguard headquarters to speak with Jack Bogle he's the founder of the Vanguard Group Jack thank you so much for being here always great to be with you I should thank you for having me here and I'm here for the Bogle heads conference this is an annual event that honors you and your many contributions to the financial services industry and we've been doing these video interviews for several years now it's kind of a tradition one thing I often ask you to talk about because I think you have a very intuitive way of approaching it is what you're expecting in terms of market returns for the equity and bond markets in the next decade sure it hadn't changed from what we talked about last year very much but there's a reality to the stock market let's take that first and the reality is that the fundamental return the dividend yield plus the earnings growth of companies drives the long-term return of the stock market the only gets in the way in the short term is a speculative return are people gonna pay more for stocks or people gonna pay less for a dollar of earnings in essence and if for example the price earnings multiple and I were to go from 10 to 20 that over a decade that would be a hundred percent increase and be seven percent added to the return each year so it can be very substantial and it also can be negative so the p/e goes from twenty to ten minus seven percent or roughly seven percent here so where are we now well the dividend yield is about 1.8 percent less than two percent I'm looking for future earnings growth of around five percent I don't think we can do much better than that maybe a lot better this year and with the tax cut and maybe maybe a little bit better next year too but maybe five percent so let's call the dividend yield two and five is seven by my numbers that's the investment return two percent dividend yield five percent earnings growth that's a seven percent return and if the price earnings ratio is to go down a little bit I think one and a half percent off that seven percent return which would be a five and a half percent return on stocks over that period and that's a little higher than I've been using maybe right maybe wrong I've usually been using about four but that's a ballpark it doesn't really matter what we guess in these areas there's no precision in any of this let's say in the four to five percent range just for the code for stock bonds are a different matter because there's only one driving factor for bonds in the long run and that is the current level of interest rates so we use a combination of the 30-year Treasury which is around a little over 3% and then we use 50 percent of that and 50 percent of the corporate rate which is around four and a quarter for 25 percent and that's going to give you about a 3 3 point 8 percent let's say but I'd round it to floating those two together return on bonds and so 4% from bonds and a slightly higher percentage from stock so the point of this is not accuracy and I would not know how to do that anyone tells you they do know how to do it shouldn't be talking to you you shouldn't be talking to them but rather that instead of the high returns of the last 25 years or the market during Vanguard's history the markets going up 12% a year I'm talking now stocks alone and if we get 5% in the years ahead just think about this for a minute at 12% a year the market doubles in six years at 5% a year the market doubles in approximately 15 years so that's it basically you're gonna get over 15 years you're gonna get four times and your money if it's if it's 12% which is not gonna be or and if it's four times a year I hope all this makes sense you're gonna get the same number but it's going to take twice as many years and that's not even factoring in inflation or taxes or expand so when you look at a combined market return of say stocks and bonds together let's call it just for the fun of it 4% I won't be far off I don't want to do too many decimal points here and the average mutual fund has expenses that come to pretty close to 2% not just the expense ratio which for actively managed mutual funds is now about I think about point 75 something like that but you have sales sales loads for a lot of funds and the funds that have dropped their sales loads have higher expense ratio there's no way around that and then internal portfolio transaction charges you don't see them but they're there and fund managers turn their portfolios over with the fury active managers that turnover rate by my measure is something like a hundred percent very very high I'm talking about purchases plus sales as a percentage that says the convention is to take the lower of a person sales in calculating turnover yeah but that ignores that the cost is both both sides of the transaction not one so you're talking about two percent cost and now you've taken the returned and then you take inflation out and let's assume that we're lucky to get two percent inflation you know I got four percent off that return five percent market return so what does this say we can't do anything about inflation but we can do something about fun cost that is keep them low period which means as you're about to say I'm sure means index fund should be at the top of your list one question that you and I have talked about over the years is just the growth of indexing and the potential for it to make the market at large start to behave differently because so much money is in index tracking products I know you've said in the past you don't think we're there yet but let's discuss your view on that topic has it evolved since we last talked or do you still think that indexing would need to get a lot larger well it's amazing to me I was citing this is that statistics of the ball go heads this morning and that is I did a study for the Board of Directors in 1975 and had the previous 35 years of large cap funds that's what we had in those days mutual funds compared to the SP index and the S&P index outperformed by 1.6 percent a year an article I wrote for the Financial Analysts Journal a couple of years ago I updated that studying went 35 years up to 2015 the previous 35 years and the difference was one 0.6 percent in favor of the index fund so why is that because the cost of mutual fund management is about 1.6 percent I mean I'm oversimplifying it's smaller at large cap funds and vigor it's small but it's telling us what we should know that the average manager is average before it costs I mean how else can I be and it's very competitive business very smart people competing with one another it's hard to get an edge so I think there's very little evidence that indexing even at 45% of the fund industry has changed the nature of the market I would add this supposing the market is less efficient and people will say AHA then managers can do well active managers have had their pagers it will be a stock pickers market as they say no because of active manager a beats the market active manager B will lose to the market I mean there's no way around the fact that if these the that part of the market that's outside of indexing if somebody does better relish the market somebody does worse relative to the market and as for a stock pickers market I mean I never saw a phrase it seems that such acceptance that meant so little when one thinks about it sure there's a stock pickers market but every stock that's picked is unpicked by somebody else everybody that buys is buying from a seller I mean it's the simplest thing in the world that people don't seem to get we're all consigned to average as a group and when you take costs out that's where the index advantage comes in let's talk about international and you and I always talk about this you're kind of a contrarian even within your firm in terms of thinking that investors don't necessarily need international stocks to have a globally diversified portfolio but you yesterday at the conference you talked about jaysis wieck's good piece on the perhaps relative undervaluation of foreign stocks do you think investors ought to look at that be thinking about the the fact that we have not seen foreign stocks perform as well as US I guess the answer to that is yes and no and number one the fact that they're undervalued may mean that they're undervalued because they're riskier which i think is at least importantly the case maybe not the entire case second I'm just a great believer in a US portfolio because we are the most entrepreneurial nation we've got the soundest institutions financial and otherwise or have had in the past governance it's pretty solid in the past at least and a well diversified economy so and and for US corporations about half of their revenues and half of their earnings come from abroad anyway it's not as if we're America first or America only the entire world economy is integrated around many many countries trading with many many other so I do not think you need international now people have been doing it for a long time the cash flows in the fun business have been much stronger international yeah than in the US and despite the inferior performance and I don't quite understand where this thing is you that you must have a global portfolio maybe maybe it's right of course maybe anything's right but I think the arguments favors the domestic US portfolio and they have to worry about whether the dollar is strong or weak one more risk or many of these foreign nations have particularly emerging market nations which are I think around 20% of the non-us index are very risky very interest rate-sensitive governmental e-naught person not strong or maybe a little capable of tipping over robberies like so I do tell people feel free to disagree with me because I'm not always right but if you if you know I have zero percent in non-us I say you should you don't need to have non-us but if you do limited to 20 percent a lot of portfolios now at 25 35 45 percent in non-us securities and I think that's just too much this podcast is brought to you by Oppenheimer funds Oppenheimer funds has nearly 50 years of experience investing Beyond Borders to find tomorrow's opportunities find out more at Oppenheimer funds calm slash global now our analysts offer their takes on earnings from Johnson & Johnson Netflix and IBM Johnson & Johnson reported third quarter earnings that largely surpassed consensus expectations but were largely in line with our expectations and so we're not changing our fair value and we think the stock is slightly over value but still very well positioned for growth on a fundamental basis and really believe that the firm has a strong wide economic mode when looking at the quarter the drug division again helped lead overall results they've got a lot of new products hitting the market that are really in areas of unmet medical need that allows them to price these drugs very well and the uptake is very strong because there's a lot of unmet medical need outside of the drug division the consumer group actually did very well and we were surprised by that it's been an area of weakness in the past so it's nice to see that group finally hitting its stride and really showcasing the brand power of that division lastly in the medical device division this is an area where Johnson Johnson has struggled a little bit with innovation and some pricing headwinds and this is continuing to be a bit of a laggard for the company and we do expect that to continue for the next couple years however longer term with some of the robotics that they're working on looks like an area of nice growth beyond the 2020 time period overall the results were better than consensus and pretty close to what we are anticipating and we continue to view the stock with a wide economic mode and just slightly overvalued Netflix posted stronger than expected subscriber guidance in the third quarter as the company beat its own wheat guidance by roughly two million subscribers the company now can has over 130 million subscribers globally as a continues to expand its global subscriber base growth is still being driven internationally as the company now has almost over 80 million subscribers yet outside of the US despite the subscriber gain Netflix continues to burn cash as the loss reached almost 860 million dollars in the quarter the company continues to expect a three billion dollar loss for the full year and continues that expects that level to continue in 2019 while the company expects an inflection point in 2020 we do note that increasing competition from not only Disney but possibly launches by Warner Media Apple and Walmart should increase the amount of competition this increased competition may force the company to continue spending on original content we are retaining our narrow moat for Netflix along with our $120 fair value estimate as we expect the company to face increasing competition over the next five years which should necessitate ongoing cash burn and limit international margin expansion IBM posted an underwhelming third quarter result as the company continued to juggle a strategic and non strategic business lines the company's legacy revenue and the decline there was apparent and we were particularly surprised by the decline and the cognitive solutions business the company highlighted things like collaboration and the mainframe middleware as areas of weakness the positive side though the global business services and global technology services businesses show improvement and we were hopeful that the digital transformation will drive revenue for the consulting and infrastructure services business lines in terms of strategic imperatives the business grew 11% on the year-over-year basis on a trailing 12-month basis constituted thirty nine point five billion dollars strategic imperatives are expected to be a decent mid term growth driver for the business however we expect a slow down over time as the compare gets harder and harder still strategic imperatives remains one of the only viable options for IBM's top-line growth rate base up it is to even achieve modest revenue growth a fair value estimate is 168 dollars on this narrow mode name we believe investor sentiment is low and we think the company is trading at a discount to our fair value estimate therefore we think the company would appeal to risk seeking technology investors go from one investment analyst to a hundred and fifty sign up today for Morningstar premium and let our independent and unbiased research staff help you find the best investments get started today with Morningstar premium next three dividend ETF pics hi I'm citizenship in ski with morningstar.com dividend paying stocks are attractive to yield seeking retirees but a collection of high-quality dividend payers can make excellent cora holdings for investors in accumulation mode - joining me today to discuss some of morningstar's favorite ETFs the target dividend paying stocks is adam mccullough he's an analyst in our manager research group focusing on passive strategies Adam thank you for joining us today happy to be here today Susan now that the first pick you wanted to focus on today is the only ETF that focuses on dividend paying stocks that also happens to get a gold fund analyst rating from us and it's also an ETF that focuses pretty much exclusively on dividend growth stocks and it's Vanguard dividend appreciation why don't you tell us a little bit about that one yeah that's right so you are right and that this is a fun looking for stocks that are willing and able to raise their dividend payments so it won't be the highest yielding dividend focused fund so it lands in Morningstar large blend category and its yield could be probably a little bit higher than the Russell 1000 but it's looking for those stocks that are of high quality and profitability that will be able to maintain their dividend payments so what it does its first it applies a backward-looking ten-year screen for stocks that have raised their dividend payments for each of the last ten years so that shows one that they're profitable enough to raise our dividend payments each year and two that their management is willing to raise the dividend payments in each of the last ten years so this is good and bad in that it finds the more profitable names but precludes names that could probably sustain their dividend payments like Apple that haven't been paying dividends for the past ten years next what it does is after it has this list of stocks sort of raised their dividend payments it weights them by their market cap so it skews towards the largest names of that set so all told it holds about 180 stocks and it's looking for those profitable names so it should hold up better during market downturns and the average fund in the category in fact during the financial crisis it only lost 46 percent whereas the Russell 1000 lost about 55 percent to boot is cheap it only charges 8 basis points a year which is also what supports it's more necessary analyst rating of gold so the second ETF that we're going to talk about today is also another Vanguard dividend focused etf but instead of focusing on dividend growers this font this etf focuses on higher dividend paying stocks is that right that's right yeah so this is Vanguard to answer to where's the yield so this fund averaged over the past five years has been about three point four percent it's a band guard high dividend yield ETF easy enough and so what this fund does is it looks for the top half of dividend payers based on their forward-looking yield and then it weights them by their market capitalization so this fund owns about four hundred names and it's less discerning the Vanguard growth it's not looking for quality metrics it's saying we're gonna look for higher than average dividend payers but be so well diversified that we can withstand the impact of the stock that cuts dividend payment or is at risk of cutting his dividend payment and has a price drop because of that so whereas the Vanguard growth funds a little more nimble this is your tank that's going to be able to withstand dividend cutters but also offer that higher yield so it's a little bit riskier than the Vanguard dividend growth fund but it still earned a Morningstar analyst rating of silver because the process is still solid and that it finds the the larger dividend yielding names and also it's well insulated against those and they cut their dividend and the charges the same fee it's only eight basis points a year for this fund as well okay and the third ETF that we wanted to talk about today is also a silver rated fund and it also focuses on those higher yielding dividend paying stocks yeah so I think this is the Schwab dividend US equity fund and it's a little bit newer to the game so I think it came out in 2011 and so this is a bit of a hybrid between the Vanguard high dividend yield approach in the Vanguard dividend growth approach so what this fund does is it looks for again at rank orders stocks that are higher than average dividend payers but then it scores them on some quality metrics so this will look for stocks that have high ro ease so return on equity so it can cover their dividend payments better debt flow or a cash flow to debt ratio so it can you know keep those payments flowing to the end investors but also look for dividend growth and dividend yield so it has a kind of a four metric composite score better two signs to all of these high yielding companies then it picks the top 100 of those and then weights those by a market cap so it's going to own bigger stock that pay higher dividend yields in the average stock but there's a little bit of a quality component to it so you have kind of the extremes in Vanguard high dividend yield Vanguard did an appreciation the Schwab fund lands a little bit in the middle it's still more towards the high yielding side so it lands in the large value category I'd yield here over the past five years an average has been maybe three point two percent whereas Vanguard high dividend yield three point four and then the Vanguard dividend appreciations fund yield is probably two point two over the past five years this fund is also cheap charges seven basis points a year and we think that it's solid process to look for high dividend payers but also apply some quality screens and then market kept weight them well set it up to do well versus its category peers over the long haul and support its morning's earning those rating of silver sounds like there's a lot of reasonably priced ETFs for dividend seekers to be considering Adam thank you so much for your time today we appreciate it absolutely thank you for Morningstar comm I'm Susie Joe Penske overwhelmed by the market Morningstar premium will help you cut through the noise and find the most promising investments get started today with Morningstar premium and finally Seth Goldstein on opportunities and electric vehicles we recently published a deep dive report highlighting our bullish outlook for global electric vehicle penetration based on our findings we see a number of attractive long opportunities that will allow investors to capitalize on increasing electric vehicle production for background and 2017 Eevee's accounted for only about 1% of total light vehicle sales globally by 2028 we expect this number to increase to 15% which is above consensus estimates of 11% a key driver of this outlook is our analysis that over the next decade EVs will reach cost parity with internal combustion engine vehicles battery innovations will also increase driving range and shortened charging times so that evie who no longer being inferior product versus icees although we have an above consensus global Eevee penetration outlook our research indicates that Eevee adoption will vary widely by region the density of charging infrastructure will be the key factor that either Spurs or limits Eevee adoption in a given region China will build the world's largest Eevee charging infrastructure system combined with the strongest regulatory push we forecast Eevee's to account for 25% of all new light vehicle sales in China by 2028 Europe with solid charging infrastructure and tightening fuel standards will be second at a 20% Eevee adoption rate the US will lag the global average at 12.5% due to fragmented regulatory policies that will limit Eevee adoption our top picks for industries that will benefit most from growing Eevee adoption or lithium producers and utilities lithium will be needed in all V's regardless of battery chemistry or Auto brand meanwhile utilities that grow their rate base by building Eevee charging infrastructure can offer the security of regulated returns to investors our top picks to play the Eevee adoption trend are Albemarle BMW BorgWarner Edison International General Motors and sqm that does it for this week's investing insights podcast from Morningstar comm we hope you have enjoyed our program and we welcome your feedback please send your comments and questions to podcast at Morningstar comm from everyone here at Morningstar thanks for listening [Music]

Channel: Morningstar, Inc.

Views: 14,681

Keywords: morningstar, investing, stocks, funds, etfs, mutual, market

Id: NeP-rJeZ0Kc

Length: 25min 37sec (1537 seconds)

Published: Sat Oct 20 2018