Motley Fool Hidden Gems Investing - Record Profits? Record Profits.

Episode Date: January 31, 2023

The list of companies who had a more profitable 2022 than Exxon Mobil is decidedly short.  (0:21) Bill Mann discusses: - McDonald's growing global sales by $20 billion during the pandemic - Exxon Mobil racking up an annual profit of more than $55 billion - Why Wall Street seemed disappointed by a share buyback plan smaller than Chevron's (10:40) Alison Southwick and Robert Brokamp discuss reasons to be both uplifted (and depressed) about the economy, debt, and pandas. Our new report, "5 Pullback Stocks" is available for free to Stock Advisor members. To access the report just go to www.fool.com/Pullback. Stocks discussed: MCD, XOM, AAPL, MSFT, CVX Host: Chris Hill Guest: Bill Mann, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. Today, we learned that for some investors, $35 billion just isn't enough. More on that in a bit. Motley Fool Money starts now.

I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Bill Mann. Thanks for being here. Hey, Chris. How are you? I'm doing okay. We're going to start with McDonald's. fourth quarter profits and revenue were higher than expected for McDonald's. Their global same-store sales were up 12.5%. And yet, shares down a little bit today due to the guidance. I want to get to the guidance in a second. In terms of the quarter, this was about as solid a set of results as you could hope for, I think, if you're a shareholder. So, Jonathan Mays, who's the editor-in-chief at Restaurant Business Magazine, who I think you know, may have been on the show in the past.

Yes, I have interviewed Jonathan Mays. Great follow on Twitter if you are interested in the nuts and bolts of the restaurant industry. Yes, absolutely. He made this point this morning, which blew my mind, that since the pandemic, McDonald's has increased global system sales by $20 billion, despite closing all of its restaurants in Russia, and that was 800 restaurants. It's unbelievable, the returns that McDonald's has generated. It is. And thank you for the reminder about Russia, because I think when that decision came down. You were on the show, we talked about that. Look, there were a lot of U.S.-based businesses

that pulled their operations out of Russia due to Russia's invasion of Ukraine. To your point, McDonald's had a substantial part of their business in Russia. This was not, oh, we've got a few locations. No. Yeah. McDonald's was one of the first Western companies to go in a huge way into the Soviet Union, went in in the 80s for a period of time. Their Moscow restaurant was the largest McDonald's in the world. So this was not a small thing for them to shut tight. So it just bears remembering, whenever you see company results, that every time period that we're in just doesn't necessarily equate to the last time period because they did something that was certainly painful for McDonald's and yet,

on the top and bottom lines, you don't even see it anymore. Let's get to the guidance then, because CEO Chris Kempczynski, among other things, said we expect short-term inflationary pressures to continue in 2023. That sounds imminently reasonable. I don't want to act like the stock is falling through the floor, it's down a couple of percentage points, but I don't know. This seems like more than one thing can be true at the same time. Yeah. I think that it probably has to do with the fact that what they are seeing, what he called was short-term inflationary impacts, also did come out and say that they would probably be going through the process

of rationalizing some of their employment at the corporate level. It sounds like some layoffs are coming down the line, or maybe not layoffs, but as they said, a rationalization where jobs that are left don't get filled. They are speaking towards what we are all wondering about on every level, is at what point do we get a control under certain costs? For McDonald's, it's labor costs, it's obviously food costs. At some point, it will be leasehold costs for their company stores as well as for their franchisees. Let's move to energy then, because ExxonMobil wrapped up its fiscal year with a bang. Fourth quarter profits were nearly $13 billion. For fiscal year 2022, ExxonMobil made a profit

of more than $55 billion. Here's the list of companies that made a bigger profit last year. Apple, Microsoft, that's it, that's the list. It's pretty good. Now, when you say ExxonMobil went out with a bang, that may not be the best news for an energy company. I could have worded that better. My apologies. This is something we've talked about for years, Bill. Look, they're in a cyclical industry, but ExxonMobil, and you can throw Chevron in there as well. ExxonMobil, due to its size, just has more options in terms of their capital allocation. And one of the things they can do in rougher times is they've got a balance sheet that enables them

to maybe make some acquisitions at a cheaper price. These are not lean times. I'm assuming the shares of ExxonMobil are down slightly because they announced a share buyback plan that's only $35 billion and not the $75 billion that Chevron announced? You know, their results are a little bit politically fraught. And you've already seen politicians from both sides of the aisle saying, look, $51 billion in profits is obscene. I want to make the point that in 2008, they made $45 billion in profits. So, 14 years ago, they made within shouting range of the same profit level. That is a compound growth rate of 1.9%.

So, when we talk about a commodity company, even a really big one coming out with record profits, you have to keep in mind exactly as you said that these are boom and bust companies. And the only way that they stay in business for the long run is being conservatively financed and conservatively capitalized. Because they had years, 2015, 2017, 2015 and 2016, where their earnings were down 50% and then 50% again. In terms of the buyback plan, Chevron went out of their way to say, hey, historically, we've done a good job buying back our stock. By the way, that should always be a question for any investor when company X comes out and announces we're doing a share buyback plan. It's a great question to ask, are you good at this? Because not everybody is.

How is ExxonMobil? Because certainly in terms of paying dividends, this is one of those companies that people seeking dividend stocks look to. Now, when I think of any share of stock, I think of it as being a perpetual claim on the earnings of a company. When you see a company buying back shares and retiring them, you should actually see, maybe not right away, you should see over time an increase in earnings per share. I mean, that's just how that math works. It is a return of capital. A dividend is also another form of return of capital. In general, because companies don't tend to be very good at buying back shares because they tend to buy them during high times and then not buy them during low times, I actually prefer dividends. So,

I'm happy to see Exxon maintain that. Their dividend is rather healthy. I think that's very sufficient. I do think probably people were looking at Chevron saying, boy, if they're buying back $75 billion, I can't wait to see what ExxonMobil is doing. Exxon may not see the same value in its shares, though. That's true. Also, it's $35 billion. That's right. This is not a pittance. This is an enormous sum of money over a two-year period that they have laid out. Hey, Chris, can I borrow $35 billion? Right, exactly. Again. To your point,

over the long haul, this is probably a better than average capital allocator if you look at all of the ways a company, particularly in the oil and gas industry, all of the options they have to allocate capital through dividends, through share buybacks, through acquisitions, through their own investment of operations. I don't know, I think you're right. Again, similar to McDonald's, not like the stock is being punished tremendously, but they wrapped up the most profitable year they've ever had. They've got a $35 billion share buyback plan in place. I don't know, it seems like it's on very solid footing. Right. For Exxon, that's about 8% of their total share count that they are buying back.

For Chevron, it's about 24%. These are massive buybacks, but I think maybe people are disappointed for Exxon simply as a comparison to the news that you got last week from Chevron. Bill Mann, always great talking to you. Thanks for being here. Hey, thanks, Chris. Part of being an investor is balancing optimism and pessimism. Alison Southwick and Robert Brokamp discuss reasons to be both depressed and uplifted about the economy, debt, and pandas. Let's start with the first piece of data indicating that maybe the finances of the typical U.S. household are going in the wrong direction. And that is, first of all, we're all worth less. Not that we're worthless.

This is that we are of lower net worth than we did a year or so ago, because last year, the S&P 500 declined 18.2%, making it the fourth worst year for the index since it launched in 1957. The Nasdaq's 33.1% drop marked its third worst year since its 1971 inception. It actually was the first year the index fell in each of all four quarters. Now, usually, when stocks fall, bonds go the other direction, propping up a diversified portfolio. But not last year, the Bloomberg U.S. Aggregate Bond Index lost 13%. And to give you an idea of how bad that was, before last year, the worst year for the index was just a 2.9% decline in 1994. So you put it together, and that classic 60% stocks, 40% bonds portfolio lost around 16%

in 2022. That was the worst year for the 60-40 portfolio since the Great Depression. And finally, our net worths aren't just determined by the values of our portfolios, but also by the values of our houses, at least for the two-thirds of Americans who are homeowners. And that has also begun to go the other direction, with the Case-Shiller National Home Price Index beginning to decline last July. And last Friday, the National Association of Realtors announced that home sales declined for the 11th straight month in December. Year over year, sales were down a whopping 34%. Well, Bro, those are some pretty depressing statistics. But what about the status of the biggest roof over all our heads, by which I mean the ozone layer. Did you know

that it's healing? That's good news. It is good news. So for those of you who weren't traumatized by the 80s, the ozone layer protects us from harmful ultraviolet radiation that the sun emits. And without the ozone layer, the earth would be burnt to a crisp, including your don't worry, be happy because single. So there's a lazy joke somewhere here about the hole in the ozone layer being caused by excessive use of hairspray in the 80s. But over the last few decades, ozone-depleting chemicals have largely been phased out thanks to the 1987 Montreal Protocol, an agreement between world governments and not 17 magazine readers. According to Paul Newman, but not the Paul Newman you're thinking of, because this one is chief scientist for Earth

Sciences with NASA, quote, over time, steady progress is being made and the hole is getting smaller. But what about acid rain, you ask, bro? Well, The Economist magazine will tell you that efforts to reduce acid rain have resulted in the greatest success story of the 90s. Isn't that good news? That is good news. What about quicksand? Because as a child of the 80s, for some reason, there's all these movies about quicksand. Very overrated. Very overrated. All right. Well, that is good news. But I'm going to counter that with, again, with some downer news. And that is, when your net worth is down, it might mean that you need to bump up your savings in order to retire when and how you want. And by the way,

that's one of the things you probably should be doing at the beginning of each year. use some tools to calculate whether your retirement is still on track. And the other good news, fortunately, is that retirement account contribution limits are higher in 2023, so workers can save even more. So, this year you can contribute $22,500 to your 401 , another $7,500 if you're 50 or older. And for IRAs, the limit is $6,500 with the 50 or better catch-up being $1,000. So, that's all good news. So, are people saving more? No, and that's the the bad news. The personal savings rate in the U.S. right now is 2.4%. At only one point since the 1950s, has it been lower? That was a 2.1% rate in July of 2005. According to a report

from Lending Club, 63% of Americans are living paycheck to paycheck, including 40% of those earning six figures. This is partially and perhaps largely due to inflation, which has hit levels not seen since the 1980s, right? The more things cost, the less we can save. Many families are definitely in difficult circumstances. But frankly, the low savings rate is also because we Americans are not a nation of savers or a nation of spenders. Well, speaking of saving, bro, did you know that pandas, bald eagles, white rhinos, and humpback whales have all come off the endangered species list? Other animals that have come off the list that I'm less excited about include the American alligator and whatever the Lake Erie water snake is. So in the U S alone, a total of 54 species

have come off the list due to recovery. Uh, and this is where I'm going to stop talking because I'm supposed to be the optimist here. And I don't want to tell you about how many have been added to the endangered list or came off it because of extinction, but pandas are so cute. Let's move on. And as a Floridian, I actually, I like, I like a good story about alligators. All right. It's never good, though. It's never alligator rescues baby from well. That's not how that story goes. That is true. That is true. All right. Well, so I like your good news there, Allison, but I'm going to counter with some more bad news, and that is household debt is rising. So we've already established that Americans are saving less, mostly because they're spending more,

but it gets worse. They're increasingly spending beyond their means. So according to Bakerate, In December, 46% of credit card holders didn't pay off their balances, and that's up from 39% a year earlier. And 43% of those with debt don't know the interest rates they're paying. But I can give them a hint. The rates are much higher than they were a year ago. According to creditcards.com, the average rate on a credit card is 20.15%. It was just 17, just 17.46% six months ago. Before this month, the average credit card rate had never exceeded 20%. Of course, the credit card companies won't say they're being greedy. They're going to blame the Federal Reserve, which went on an unprecedented rate-hiking binge last year and will likely

continue a little bit into this year. The idea, of course, is that the higher rates will rein in demand, slow down the economy, and bring down inflation. But in the meantime, this combination of higher prices and higher interest rates is walloping many consumers. As a final example of this, consider that according to Edmunds.com, almost 16% of car buyers in December who finance the purchase are paying more than $1,000 a month. And that is an all-time high. Okay. So yes, we are a nation of spenders, but the good news is that one of the biggest ticket items in your life is less likely to kill you. So back in 2009, stick with me here, bro. i told you i was cracking myself up with this episode okay back in 2009 the insurance institute

for highway safety decided to celebrate its 50th birthday by crashing a then new 2009 chevy malibu into a 1959 chevrolet bel-air four-door hardtop sedan it was an offset but you can essentially imagine a head-on test between a widow chevy malibu and what autoblog described as a big old Detroit dreadnought from the era of Elvis. So how did it go? The 59 Chevy was crushed like a tin can while the crash test dummy in the 2009 Malibu went on to crash another day. Google it. It's a fun video. So the good news here is that driving is much safer than it used to be. Car accident fatalities have declined by an incredible 78% since 1960. Better seatbelts, headrests, safety standards, airbags, and more have all contributed to the roads becoming safer. And according to the

National Highway Traffic Safety Administration, this translates to more than 600,000 lives saved since 1960. Wow, that is excellent news, especially as someone who has young people and teenagers driving. Boy, that is a fun experience as a parent. But let me move on to some other downer news here, and that is things actually financially could get worse with a recession, possibly, probably on the horizon. So if you look at any survey of economists, CEOs, investment managers, you're going to likely find that the majority expect a recession this year, perhaps maybe early next year. Of course, the economy is already slowing down. Last year, the first two quarters were negative GDP, although the year actually ended

up ending relatively stronger. But some sectors are already in a downturn. Housing, tech, financial services, at this point, we've all heard about layoffs of companies like Amazon, Meta, Microsoft, Goldman Sachs, Morgan Stanley, Redfin, Spotify, and yes, even Yankee Candle, who laid off 13% of their employee force. This is the biggest risk during a recession. Yes, your stocks could drop, but they'll ideally eventually recover. Since they tend to drop before a recession starts, it could be that the worst is behind us. Maybe that's what last year's decline was all about, although nobody knows for sure. It could go down further. Ideally, don't have any near-term money in the stock market anyhow. All the money you need in the

next few years is protected. The real risk of a recession is to workers, to their jobs, and to their income. Unemployment rises and companies are less generous with benefits and raises, which can make it harder for people to pay down their debts and increase their savings. Well, that is scary news, bro. But did you know that the number of children in the U.S. living below the poverty line has plummeted by 59% since 1993. According to the New York Times, child poverty has fallen in every state and it has fallen by about the same degree among children who are white, black, Hispanic, and Asian living with one parent or two and in native or immigrant households. Even despite the great recession, expansion of the earned income tax credit and

other safety net programs helped bring 11 million children out of poverty over the last 30 years. But you know, while we're talking about the threat of a recession, now not everyone is preaching doom and gloom. Some economists like Campbell Harvey say that despite how inverted yield curves have preceded previous recession, this time it's a false flag and we're not in for a full-blown recession. Reasons include that companies are already changing course with risk mitigation in face of the inverted yield curve and that the job market is strong. Yes, I know there have been a lot of layoffs in tech, but Harvey argues that they are highly skilled and they won't be unemployed for long. The World Bank's president agrees that we're in for a

slowdown of a couple of years, but not necessarily a recession. And Moody's chief economist is saying that we're in for a slow session. I mean, that doesn't sound so scary, right? Actually, I agree with that because there are two notable things about that. The whole idea of the inverted yield curve where shorter-term rates yield more than longer-term rates being a precursor to recessions, that was really pretty much identified by Campbell Harvey, who's a Duke economist. And the fact that he's saying this could be a false alarm really says something. And plus, the Moody's economist is my favorite economist. So, I like to listen to what he's saying, that being Mark Zandi. So, that is good news. And I hope we have a slow session

rather than a recession. Wait, is my optimism rubbing off on you? Maybe a little bit. Maybe a little bit. All right. Okay. Except I'm going to completely counter that with my final piece of Downer data. And I know I'm known as the awfulizer around here, but even I find this one particularly gloomy. And it's this, we're dying sooner. So according to the Center for Disease Control, life expectancy for Americans went down more than seven months in 2021, which followed a decline of 1.8 years in 2020. So life expectancy of someone born in the U.S. is now 76.4 years, reversing progress made over the previous two decades. So now, as you might expect, one of the biggest reasons is COVID,

which was number three on the list of leading causes of death. Another factor is increasing drug overdoses. But the other leading causes are ones that have been around for a while, namely heart disease, cancer, and strokes. A few episodes ago, we discussed the connections between health and wealth. And the evidence is clear that focusing on one leads to improvement in the other and vice versa. So consider this just another nudge to encourage us all to develop better physical as well as fiscal habits. Bro, bro, bro, bro, bro. As is true with the stock market, looking at a timeline of a couple years can highlight short-term pain. So it helps to zoom out a bit and get some additional context, the longer view. Global life expectancy in the

1800s was only 29 years old. And in 1950, it was 46 years old. Compared to today, and even despite the 1.8 year decline, that's still a hockey stick chart of an increase in life expectancy of more than 25 years. And much of that is due to improvements in infant and child mortality. In 1960, the child mortality rate in the U.S. was just over 3%, but in 2020, it was 0.63%. Globally, according to UNICEF, the under-five mortality rate declined by 59% between 1990 and 2021. So because of the work done to improve medical care, access to healthy food, clean water, and much more, maybe we should all take a victory lap. But, like, literally, though, because we could all probably use the exercise. And I have to say, there's probably nothing that makes me happier than to think that there is a

lower mortality rate for infants. That is indeed very good news. All righty, Allison, it's time to wrap this up. Well, as the optimist here, I've spent some time pointing out that things can change for the better. From the hole in the ozone layer to pandas and childhood poverty, there is room to be optimistic about the future because people are resourceful and often successful when they choose to take action. Yeah. And while I pointed out some of the current events that point to the finances of the average American household, it's sort of going in the wrong direction. The truth is my mantra for years has been always be a short-term pessimist and a long-term optimist. So what does that mean? It means prepare for near-term challenges really

at any point. And you do that by having an emergency fund, spending less than you earn, working to be debt-free eventually, and working smart to increase the chances that you'll have a job. And finally, don't put any money you need in the next few years in the stock market. But then count on things going well over the long term, on the economy growing, and then you can benefit from that by being a part owner of many companies by buying shares of their stock. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.