Motley Fool Hidden Gems Investing - Cable Takes on The Mouse

Episode Date: September 5, 2023

If you can’t watch ESPN right now, it’s because one cable company is taking a stand against Disney. (00:21) Ricky Mulvey and Jim Gillies discuss:  - Charter Communications’ problem with the streaming economy.  - DoorDash’s battle with restaurants over pricing.  -  Why investors may want to look at Canadian banks. Plus, (17:52) Deidre Woollard and Robert Brokamp check in on the bond market, and how investors can benefit from higher rates.  Companies discussed: CHRT, DIS, DASH  Host: Ricky Mulvey  Guests: Jim Gillies, Deidre Woollard, Robert Brokamp  Engineers: Dan Boyd, Rick Engdahl  Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. A major cable company tells Disney, it's not me, it's you. Motley Fool Money starts now. I'm Ricky Mulvey, joined today by Jim Gillies. I am excited for the show we have coming up because today you are fired up every day i'm fired up ricky but yeah today i think you selected the stories deliberately to provoke an old man shouts at clouds so might as well do this the first one is the battle between charter communications and disney if you are one of the 15 million paid tv subscribers you cannot watch disney networks on linear television that means espn

jim this beef is a little bit different than the traditional carriage rights disputes where One company wants a little bit more money, one company wants a little bit less money. To set the table, what does Charter want from Disney? Well, Charter wants to pay less. I think Charter would like to go back about 20 years and maybe do some other renegotiations. But yeah, no, everyone is fighting over table scraps at this point because the traditional cable model, which I assert has been dead for at least a decade and a half, and we've just been watching the cable companies fight over the declining scraps. I mean, you know, and the

streaming services, for a consumer perspective, I want to underline, for a consumer perspective, have never been better. You know, I personally subscribe to Netflix Prime, Disney+, Crave, which is a Canadian HBO provider, and Sportsnet, which is sort of the Canadian version of ESPN. And all of those together, I think we've got Apple TV somewhere in there too, all of those together are almost $40 a month less than what a cable subscription would be here. And we're drowning in content, we're drowning in quality content, but someone's got to pay the piper for that, and it's the content providers, that would be your Disneys and what have you, increasingly Apple and increasingly a lot of the other streamer services.

And the cable companies, no one wants our linear TV anymore. Oh, and by the way, Disney, you're withholding, you want more money for ESPN, we want to pay you less money for ESPN, and so you're talking about setting up a competing app, you've already got most of your other content slotted in on that Disney Plus thing you started building during the pandemic. streaming world, I've been saying for a while now, the streaming world is essentially, it's an arms race, great for the consumer, but it's an arms race that these companies are increasingly not winning, and since they're mostly publicly traded, public investors are

not winning. That starts becoming a problem. It's great as a consumer, terrible as an investor in these things. I offer some respect to Charter. They recently published an investor slide deck. It's called The Future of Multi-Channel Video, Moving Forward or Moving On. It's a fundamental disagreement with the model and a lot of it comes down to, hello, Disney, you would like us to pay you more for rights fees to carry your networks. Meanwhile, you are using these networks to build your streaming apps of which we have no participatory stake in or a very small one. You're not even giving us the best content because you're trying to drive people to all of these apps. I think this might go on a little

bit longer than a lot of disputes that we've seen in the past. I agree 100%. I believe in my notes as we were planning the show, I put down that some men just want to watch the world burn, which of course is, I believe, a Dark Knight quote. We're seeing that because, yes, Yes. Disney, aside from their charter negotiations, is doing things harmful to charter and other cable companies, of course. Disney is doing those things because it's beneficial to them, so everyone's playing the self-interest game, which, okay, that's fine. But it becomes a bit problematic if you're an investor in these situations, it's very fluid. We've even talked about the writers' strike and the actors' guild strike, which of course are all about

more money going to content creators, content providers, but it's not going to the studios, it's not going to the big corporate entities. I'm going to make up the number. I know I'm precisely wrong, but I'm roughly right. I believe the average writer's salary was somewhere in the $65,000 to $70,000 range. Average, of course, means half or lower. I have a difficult time squaring that with Bob Iger's $50 million paydays every year. Jim, they can't afford it in a higher interest rate environment. You see the cost of capital goes up. That means they have less to spend on projects like streaming and television. I'm going to point out that, again, another facet of capitalism is destruction. If you

can't afford it, that seems your problem, not mine. I think the timing of Charter's negotiation to change the streaming model, which is, let's bring in more networks and create a pay TV model on streaming, which fine, let's do it again. I don't think it's entirely coincidental with the actors in writer's strike. If you're going to kick a giant, maybe, maybe kick them when they're down a little bit, but if you're Disney or Warner brothers discovery has been affected by this as well. So as paramount, what do you think is, what do you think is the bigger deal in the boardrooms? Is it, is it the writer and actor strike or is it this, this carriage rights beef? I think longer term, it's gotta be the writer and actor strike because they are,

they are the backbone of your content creation. Again, right now, I don't know who it was who came up with the golden age of television, I think, that kind of started with The Sopranos on HBO. But the number of high-quality shows that are out there, the amount of high-quality content, I'm going to put sports, live sports over in the corner for now, and that you have a library of such things that you can watch pretty much whenever you want. I think that's amazing for, again, from a customer perspective. But video this weekend surfaced of Aaron Paul, who's one of the two co-leads of some little show called Breaking Bad. I don't know. It's only on the short list for best shows of all time. And he was on the picket lines talking about how

he's making nothing from residuals, even though that has been a staple show on Netflix, at least here in Canada. It was on Netflix before it was even finished on AMC, like the earlier seasons. and that's where most people discovered it, at least in my circle. That kind of ire and bile by your content providers, now, Mr. Paul, of course, I don't think he's suffering, he's got his gambling ads, he's got other shows he's done. But I like the fact to see that he's kind of standing in solidarity with lower-paid folks in his industry as well, but that he's getting no benefit from the continuing popularity of that show, whereas in previous iterations, syndication shows, the actors on Star Trek or Seinfeld would get paid when they were going into syndication.

I don't think those strikes are going to be over soon, watch them be settled today. But it is a fundamental shift, I think, in the industry that those people are not getting paid what they perhaps once were because it's the streaming model. They're angry and I think they're scared. I understand why. Again, you put that against the backdrop of the industry shift, cord cutting, and whatever we talked about earlier. I think this is going to go on for a while. I think the longer it does, the more important those things are to the content providers. But again, there's already so much content. I think a lot of players in this space, I'm including corporate as well as individuals, I think a lot of players in the space are probably going to have a

radically different world when the dust does settle. I want to move on to the next topic, but I want to say, I don't see how they settle the residual discussion without releasing streaming data, which none of those companies Well, of course not, because when you see the streaming data for the aforementioned Breaking Bad on Netflix, I think it'll be pretty good, and Bryan Cranston and Aaron Paul will have a pretty decent argument saying, where's our cut? Maybe not Secret Invasion. Anyway, I want to move on to my second story, which is DoorDash. Food delivery giant DoorDash, or Last Mile Logistics Company DoorDash, however you want

to slice it, is trying to bring delivery menu prices closer to the one seen in a restaurant. Restaurants often raise prices on these delivery apps in response to the 15% to 30% commissions. Wall Street Journal has reported that DoorDash has emailed at least one restaurant chain that it would appear less prominently on the app if it didn't cap delivery prices at a 20% markup. Jim, what do you think this dispute says about DoorDash? Well, it says that they're willing to throw their weight around. I think if we're going to go for a theme from today, it's going to be companies willing to throw their own weight around because they're trying to maximize their take and people get perhaps a little hurt.

My take on this story and in DoorDash in general, we've talked often about David Gardner has the snap test. If you snap and the industry disappears, how does the world look? What's the fallout thing? So, if we snapped away the internet, we snapped our fingers, the internet doesn't exist, life is radically different. I submit to you, if we snap our fingers and DoorDash and its competitors cease to exist, the world would be radically better. I think that I kind of look at this and go like, why do people hate their money? The one article we looked at, they talked about just a standard order from McDonald's. You may have heard of them, their burger chain. A standard order, if you ordered online, was 45% higher in terms of price, and then you've

got to pay the delivery fee, and then unless you're a jerk, you should probably tip your dasher. I don't think it's out of the ordinary to suggest that your Big Mac meal, if you door dashed it to yourself, is probably 70%, 80% higher than what it would be if you'd walk into the store. do you hate your money? But look, I get it. I understand why DoorDash is throwing around, but I've always looked at, I have very fond memories. No, not very fond. I have fond memories of when DoorDash IPO briefly, it was valued higher than FedEx in terms of market

capitalization. And I said, that makes complete sense. One of them is a global network that can get you anything, anywhere, anytime. And the other one delivers cold food to you at exorbitant prices. So they're exactly the same. Of course, they should have the same market cap. I hope you caught the sarcasm. Here's what I'll say about DoorDash though. I would have expected revenue to completely fall off a cliff after the pandemic and the exact opposite has happened for them. But still, this is a market share dominator for food delivery. It also has no physical goods. It makes more than $7 billion in yearly revenue and an employee base of mostly gig workers. Jim, I have no idea how this company cannot make an operating profit.

That's a great point. It's very similar to some of the other companies. I think Uber, if it's not still operating profit negative, it certainly was for a long period of time. I'm a very cash flow guy, so I took a little bit of look at these things. I like their balance sheet in that the fact that they've got about $3.5 billion in cash, they got zero debt. The first half of this year, the cash generation looks pretty good. I would guesstimate free cash flows in the range of $625 million, $630 million. But you realize that $540 million of that is stock-based compensation, which, Ricky, by the way, is why it's not turning an operating profit, because all that SPC is on there. But the

problem is another $140 million. Again, this is the first half of this year. $627 million is my number of the cash is generated, but $541 million of that's SBC, stock-based compensation. You're paying your insiders somewhere from that. $140 million of that is from a favorable move in what's called funds held at payment processors. That's an item that will go positive or negative back and forth over time. It's just a timing issue here. Another $180 million positive contribution from accrued expenses and other liabilities. Again, that can go just the other way, frankly. It's not impossible that a year from now, we'll be talking about how their cash generation has been basically zero aside from SBC. Of course, over the last year, they have spent $1.1 billion

on share buybacks. This is a $33 billion company, by the way. They spent $1.1 billion on share buybacks. Their share count is up over that same period because all that stock-based compensation is turning into shares. Basically, that's not free cash flow that this company has made, so much as it's deferred compensation expense for insiders. As an outside shareholder, I want to run the hell away from that as fast as I possibly can. Let's see if we can land this plane in a slightly more positive place, Jim. Sorry. No, I picked these topics for a reason. I got it.

Yeah. It's the day after Labor Day. If I get Jim talking, that's less work I have to do. Deidre and Bro, in a few minutes, are going to talk about what higher interest rates mean for your investments. Open floor. Right now, the overnight rate is 5% in Canada, 5.5% in the United States. What's a story or company you're watching a little bit more closely in a higher interest rate environment? Sure. Well, the higher interest rate environment has been part and parcel of what we've been seeing for almost the last two years is talking about, and we're going throw in the inverted yield curve and whatever else. We've been talking about, hey, there's a recession coming and we've been really planning for this next recession. Now I hold that recessions

aren't anything to be scared of. They happen because they're a natural part of the business cycle and there are opportunities for investors. However, people tend to like to fiddle with them and get freaked out by them. But I've been a little skeptical too for the last little while because the job numbers have been solid, spending numbers have been solid. There's that DoorDash reference. But at least here in Canada, it looks like they just had the Q2 GDP come out last Friday. It was surprisingly down. We've had almost as many interest rate hikes as you have. They're meeting again this week. They're probably not going to raise this week based on those GDP numbers. But rates have been jacked really hard in Canada, as in the States. And what that's done

is it's problematic for a lot of the big Canadian banks. Usually, when rates are going up, you're expecting a spread and you expect good things for the banks. But the problem is their lending here is problems. All the big six Canadian banks have all reported earnings recently, and all of them are taking much larger loan provisions because they're worried about recession and people not paying back their borrowing. We've got a nascent housing crisis here as well. Good thing no one borrows for houses. What this has done is steadily driven down the Canadian banks as we've got these higher interest rates. The Canadian banks right now, the big six Canadian banks, five of which are also cross-traded. They're both traded on the New York Stock Exchange as well as Canada,

so American types if they are so inclined can buy some of these. The average dividend yield on the big six Canadian banks is 5.2 percent. The average forward valuation, forward PE ratio was 9.5. The average price to book about 1.34. These are valuation levels, certainly on the forward earnings thing as well as a little bit on the price to book. We're getting to levels where in the past 30 years, we've seen valuation levels like this three times. Once in the first half of of 2000, something happening there. Once in 2008 and into the Q1 of 2009, again, something happening there in the broader world, and then March 2020. I believe you said before the show, Ricky, that what's common there is bubbles popping and problems arising. That's

kind of where the valuation are. Another 10 percent maybe in the valuation or less in couple of cases were there. Historically, buying at those valuations, if you can buy it, sit down, put them away for the next three to five years or longer, those valuation levels, those were really fearful times to be buying bank shares, and they're also incredibly lucrative times to be buying buy shares. If history is a guide, I'm looking at these numbers going, there's not a a lot of positivity here. I think I want to play in this space. We ended with a little positivity. Go us, Jim Gillies. Appreciate your time, insight, and sarcasm. Thanks as always. Thank you.

Savers should benefit from higher interest rates, but that's not always the case. Deidre Willard caught up with Robert Brokamp to check in on the bond market. Okay, so we know higher rates. The thing about higher rates is they mean different things to different types of investments. We're going to break it down a little bit. Let's start with the easy stuff. For years, holding your money in savings, that was not great. It's changing, and that's good news. How should we think about holding cash right now? Should we be following of those interest rates? That definitely is the good news about higher interest rates. We're finally getting some return on our super safe money.

It definitely makes sense to put in the effort to make the most of your cash. It's surprising to me how much money is still sitting in low-yielding savings accounts, low-yielding checking accounts. Get out there and look for better rates. Probably won't come from your neighborhood bank. Look online. The Motley Fool has a website called The Ascent where you can find higher yielding options. See what's being offered in your brokerages. Money market funds are yielding over 5% these days. Great options. It is important to know that money market funds are not FDIC-insured. Money market accounts are, but not money market funds. When you're thinking about where you should put your cash, think about how important FDIC

insurance is, that type of safety is. For the money you want to keep super safe, maybe stick with CDs, cash, high yield savings. If you're willing to take a little bit of theoretical risk go with money market funds? Well, let's turn to bonds, because I feel like this is always the area where things are complicated for me personally. We're in this inverted yield curve. We've been there for a while. It means short-term bonds are outperforming longer ones, which doesn't usually happen. A lot of people have speculated on what it may or may not mean for the economy. We're not going to do that today. But what does it mean if you're an investor? It is unusual to have short-term bonds

yielding more than intermediate to long-term bonds. So, it does make sense to maybe favor cash short-term bonds over intermediate bonds. In normal times, when the yield curve is upward sloping and not inverted, you might do a bond ladder. Let's say you have $100,000 and you put $20,000 each in bonds that mature in one year, two year, three year, four year, five year. Nowadays, it might make sense to have a bond ladder that is more tilted towards one-year bonds, maybe even six-month bonds, like six-month treasuries. But don't ignore putting some money in intermediate bonds, because here's the deal. We know, especially from this century, that certain events can happen that can change interest rates immediately.

A terrorist attack, a run on the bank, a pandemic. And all of a sudden, interest rates go the other way. And those three-, four-, five-year bonds that you had that seemed like, eh, these aren't great yields, may then seem like really great yields because interest rates went the other way so quickly. Interesting. Okay, so we want to keep some in short-term to sort of take advantage of what's happening now, but then we never know what's going to happen, so we should have some in long-term. Is that sort of how it breaks down?

I would say more intermediate-term. Once you get to long-term, you get into a good bit more volatility in the bond market, which can be fine for some circumstances, but generally speaking, the risk-reward trade-off is not worth it. So, I think it makes sense to stick with short and intermediate-term bonds. OK. So, short and intermediate. What about bond types? Right. There are lots of options out there. Right now, frankly, some of the best bonds are coming from Uncle Sam. Treasury bills, which are treasuries that mature in a year or less, are offering great yields, over 5%, 5.4% in the case of the three- and six-month

Treasury bill. Plus, Treasuries are free of state and local income taxes. If you're investing outside of a retirement account and you're like New York or California, it makes it even more compelling. I think Treasuries make a lot of sense. Now, you can also do corporates. Corporates theoretically yield a little bit more, and they certainly do once you start moving down on the credit scales. But that's more risk, right? That's more risk in two ways. One is, there's a greater risk that the issuer will default. And there's also the fact that if there is a recession or an economic downturn, corporate bonds tend to drop more in value. One of the reasons why you have bonds is you

want something to hold up when the stock market goes down. So, you are taking a little bit more risk. It's fine to have some of that, but just understand the risk you're taking. If you're in a higher tax bracket, municipals make sense because municipals are free of federal taxes. If you buy the right ones, often like if you live in California and you buy a California bond, it's free of state taxes, too. So, for those who are in a higher tax bracket, municipals make a lot of sense as well. Why do municipalities not make sense if you're in a lower tax bracket? Because they yield less.

They're offering less yield because they know people are buying it partially for the tax benefits. So if you are in a low tax bracket, it makes sense to buy a regular corporate bond, pay the taxes, but the taxes aren't that big of a deal because you're in a lower tax bracket. So the after-tax yield is what you're looking for. In fact, if you look online, you'll find calculators that are called tax equivalency yields. It'll help you determine whether, given your tax bracket, a municipal or a corporate or a treasury makes sense for you. Interesting.

This is all kind of complicated. It's a whole other layer to your investing. Some people might choose to use bond funds the same way you might choose to use an ETF in the stock market. Is it a good idea to use bond funds? Does that cut through the confusion, or are there any risks there? I would say normally it does, because buying individual bonds can be complicated. It's very different than buying individual stocks.

Buying a bond fund is a great way. You just make a single purchase and you get an automatic, low-cost, diversified portfolio of bonds. The tricky part of bond funds is that they've been so disappointing over the last few years. The bond market in general was down a little bit in 2021. 2022, the worst year for bonds in our lifetimes. 2023, things were looking OK until rates went up again towards the end of July and August, and now bonds are essentially flat for the year. The thing, though, that I think people need to understand is, if your stocks go down, you don't know if and when they're going to go back up. Bonds are very different.

The reason bond funds and the bond market in general have been down over the last few years is because interest rates went up. The prices of bonds went down, but they will go back up as the bonds get close to maturity. If you look at one of the biggest bond funds in the world, the Vanguard Total Bond Market ETF, according to Morningstar, the weighted price of the bonds in that are trading for $0.90 on the dollar. They're trading at a discount. As long as all those issuers stay in business, and most will, you're going to get a little bit of a capital gain along with the interest payments. So, bonds, you could actually even think of as a good buying opportunity right now.

The problem with bond funds is you don't know when that return is going to happen, when bonds are going to return to their par value, because the manager of the bond fund is always buying bonds and selling bonds all the time. This is why some people find individual bonds more appealing, because that way you buy a bond, You know when it's going to mature. You know how much money you're going to get back. It's a lot more predictable. Within the bond fund, do you have short-term, intermediate, and you have the different types of bonds as well? Yes. It is important to look at what's inside a bond fund or a bond ETF to make sure

you understand what you're buying. We've talked about the difference. You can buy funds that just invest in treasuries, just in municipals, just in corporates, just in junk bonds, which are corporate bonds, but issued by companies that don't have the greatest ratings, but you have higher yield to compensate you for that risk. If you look at a very diversified bond fund like the Vanguard Total Bond Market ETF, which I own, it owns a little bit of everything. Excellent. Well, I want to talk about I-bonds a little bit, because I listened to your show with Dan Kaplinger on Motley Fool Live, and Dan was all in on I-bonds earlier. Now, I know the rates have gone down a little bit. How should we think about I-bonds now?

I-bonds were the hottest thing going about a year ago. First of all, they're technically known as Series I Savings Bonds, issued by Uncle Sam, so technically the safest investments in the world. They were yielding 9.62%. How can you beat that? Here's the thing about I-bonds. The rate is made up of two factors. One is a fixed rate that you will continue to get through the life of the bond that you own, and then one that adjusts every six months for inflation. Because inflation has been coming down, if you were to buy an I-bond today, the yield would be 4.3%. Not horrible, but not as good as 9.62%. The fixed part of that is only 0.9%. If you were to buy an I-bond today, the way to think about it is, for as

As long as I own this iBond, I will earn whatever inflation is, plus 0.9%. For that reason, if you are looking for some sort of bond-like security that will be almost guaranteed to beat inflation, I think individual Treasury inflation-protected securities make better sense today. These are called TIPS, also offered by Uncle Sam. Nowadays, the yields on TIPS are the highest they've been in more than a decade. A five-year TIPS is yielding about 2%. You are guaranteed, as long as you buy it at par and hold it to maturity, to beat inflation by 2%. Again, it's the safest investment in the world, and because it's a treasury, it's free of state and local taxes.

It's all very good. I will say, though, this gets a little bit in the weeds. The taxation of TIPS is really complicated, so it's probably better to keep it in an IRA or a 401 . TIPS funds have been sort of disappointing. So, if you've owned those, I would say that I can understand how you'd be a little skeptical of tips. These days, I think buying individual tips probably makes a lot more sense. OK. We've talked about interest rates with cash, good. Bonds, some good, some bad. Let's move on to equities. How are the rates affecting the stock market?

I'll just use the famous quote from Warren Buffett, and that is, rates are like gravity to asset prices. If rates go up, it's generally not good for stocks. When we saw that in 2022, rates went up, stocks were down, S&P 500 down about 18%, growth stocks, NASDAQ down about 33%. Rates moderated for the first half of this year, which is why stocks did well, particularly growth stocks. Then rates went up, and that's why we saw the market come down a little bit in August, about 2% for the S&P 500, around 3% for the NASDAQ. Generally speaking, it's not great, but it really does depend know what kind of stocks you own. You should look at your individual holdings and just

be aware of how changes in interest rates affect your holdings. There's some generalities we can make. Traditionally, value stocks tend to do better in a rising rate environment. Again, that's why last year was rough on growth stocks. They were down more than 30%. Value stocks were only down about 2%. But that's just a generality. Essentially, it's something that I don't think too much about because I'm a long-term investor, and I think rates generally over the long-term will kind of even out. But I think it's better. It's helpful in understanding why your portfolio may have performed differently one month to the next. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal

recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.