Warren Buffett has $100 Billion in cash on the sidelines. GE has lost more than $120 billion in market cap this year, and just slashed their dividend by half. The headlines are touting Wall Street gains and all-time highs, seducing Main Street investors to want to jump into the pool party. However, the smart money is not buying it.
Hear Warren Buffett explain why on Bloomberg, and why bonds are even less attractive than stocks.
Essentially, stocks are overpriced and bonds are far worse, which is why Buffett is keeping so much in cash, when he would prefer to invest at least $80 billion of the $100 billion he has sitting on the sidelines. As Warren Buffett noted in his Bloomberg interview of yesterday, “If you put $100,000 in a 10-year [Treasury] bond, you’re paying 45 times earnings.”
On Nov. 14, 2017, Buffett reduced his holdings in IBM by another 1/3, down to 37 million shares, with a market value of about $5.4 billion. He also sold shares in Wells Fargo, Charter Communications and Wabco Holdings (a car parts company, based in Brussels).
What Happened to General Electric?
GE’s share price has lost 43% in 2017. The dividend was slashed by half on Nov. 13, 2017, to 12 cents a share per quarter (from 24 cents). (Since 1940, the only other time that GE cut its dividend was in 2009, during the Great Recession.) Investors recently learned that GE has been using all of its profits to buy back its own stock and pay a high dividend for years, essentially propping up its own share price.
The reason that dividends are riskier than most investors realize is that when the company cuts the dividend, you don’t get advance warning. You lose the dividend income and a great deal of your principal in one fatal shot. Of course, at that disappointing moment, investors are tempted to cut their losses – selling low, the opposite of the age old Wall Street adage Buy low, Sell High.
GE is not the only company using buybacks and dividends to make the company attractive to investors. According to Howard Silverblatt, the senior index analyst for S&P Dow Indices, dividends set a record in the 3rd quarter of this year, at $105.4 billion, $12.31 per share, and are expected to beat that record again in the 4th quarter. Dividends shower investors with love, keeping them complacent and distracted from understanding the health of the investment. Corporate buybacks inflate the earnings per share, even if the earnings are weak, and make the stock price look cheaper. Financial engineering of this nature has fueled the 8-year bull market. GE is the first company (outside of the retail industry) to show vulnerability. However, it is unlikely to be the last.
Is Verizon Next?
As I pointed out in my book, The ABCs of Money, which was published in 2012, the higher the dividend the higher the risk.
Verizon is paying the highest dividend yield on Wall Street. So, what’s at stake? Verizon’s annual dividend payout for 2017 will be almost $12 billion. Last year’s annual income was $13.13 billion. Essentially, Verizon is doing what General Electric is getting criticized for doing – using all of the company profits to pay dividends.
While Verizon is rewarding investors, the company is shafting its staff and borrowing from Peter to pay Paul. Verizon is $18.3 billion underfunded on its Other Post Employment Benefits and $6.4 billion underfunded on its pensions (source: S&P Dow Indices 2016 Report on Corporate Pensions). AT&T is the most underfunded on OPEBs and pensions ($33.7 billion) in the S&P500, with Verizon on the second position.
Verizon’s long-term debt and liabilities are $226 billion, with a debt to equity ratio of 4.3. Some investors, perhaps without even knowing about it, just loaned Verizon $1.5 billion, which doesn’t have to be paid back for 30 years, and only pays 4.95% (less than the common stock dividend, which doesn’t require any time commitment). The problem with that is that with all of the debt, promises and liabilities that Verizon has, it is very possible that the company will need to restructure sometime over the next 30 years. 4.95% interest is a very low return for taking on the risk of a bond that is only one grade above junk (at BBB+).
I warned about AT&T, GE and Verizon in December of 2015 – two years ago. Bankers have been willing to loan cheap money (5%) to these heavily indebted companies. The companies themselves have rewarded investors with dividends and buybacks – pushing their stocks to all time highs. Investors were happy and complacent. Workers complaints didn’t make the headlines. Telecom employees were likely more worried about losing their job, and joining the burgeoning ranks of underemployed, who are trying to make ends meet with multiple jobs, than they were about losing their benefits.
Though stocks are high and Warren Buffett has a lot of cash on the sidelines, the right answer isn’t jumping all in or all out. Market timing doesn’t work because it is impossible to time the exact high and low. You’ll be early getting out and late jumping back in. My pie chart system is time-proven, easy and less time and money than most people spend.
Now is definitely the time to do a wisdom-based analysis of what you have in your retirement plans because the last two times that the U.S. economy went 8 years without a correction, most people lost more than half of their nest egg. Just asking your HR person or the broker-salesman will not necessarily get you safe before the next downturn. There is an inherent conflict of interest in the financial services industry, which means that you must be the boss of your money, know exactly what you own, and make sure that you are safe and diversified. Are you over-invested in risky, dividend-paying stocks? Have you been put into expensive, low-yielding, long-term bonds that could lose money or become illiquid?
You can read and implement the strategies in my three bestselling books. (Get links on the home page at NataliePace.com). You can call my office (at 310-430-2397) and schedule a second opinion of your current budgeting and investing plan. If you’d like to learn the ABCs of Money that we all should have received in high school now, before the next downturn, register for my Valentine’s Retreat in the beautiful beach town of Santa Monica, California. Only 5 seats remain available. You get the best price when you register with a friend by December 15, 2017. Call 310-430-2397 to learn more now.
Please note: NataliePace.com does not act or operate like a broker. We report on financial news, and are one of the most trusted independently owned and operated financial news corporations in North America. This article is intended to educate and inform individual investors, and, thus, to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned in this article are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies.Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.