Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. tells Disney, it's not me, it's you. Motley Full Money starts now. I'm Ricky Mulby, 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, 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, you know, wants to pay less. They would like to, I think Charter would

like to go back about 20 years and maybe we'd 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. 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 on our line for consumer perspective have never been better. I personally subscribe to Netflix Prime Disney Plus 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 that, you know, it's the content providers, that would be your Disney's and what have you. They're increasingly Apple and increasingly, you know, a lot of the other people, you know, a lot of other streamer services. And the cable companies are, you know, no one wants our linear TV anymore. Oh, and by the way, Disney, you're trying to, you're withholding. You want,

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. Like the streaming world, I've been saying for a while now, the streaming world is essentially like, just like 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, it's publicly traded, public investors are not winning. And so that, that starts becoming a problem.

It's great. Great as a consumer, terrible as an investor in these things. I offer some respect to Charter. Yes. They recently published an investor, an investor slide deck. It's called The Future of Multi-Channel Video, Moving Forward or Moving On. And 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. And 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 those, 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 night quote. And we're kind of seeing that because, yes, Disney is, Disney, aside from their charter negotiations, is doing things harmful to charter and other cable companies, of course.

But, you know, and Disney is doing those things because it's beneficial to them. So everyone's kind of playing the self-interest game, which, okay, that's fine. But, you know, it becomes a bit problematic. If you're an investor in these situations, it's very fluid. And we even talked about the writer's strike and the actors' guilds strike. which of course are all about, you know, more money going to, you know, content creators, content providers, but it's not going to the studios. It's not going to the big corporate entities. And so 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, you know, with Bob Eager'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. So 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 sort of a pay TV model on streaming, which fine, let's do it again. I don't think it's entirely coincidental with the actors and writers strike. If you're going to kick a giant, 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 is Paramount. What do you think is the bigger deal in the boardrooms? Is it the writer and actor's strike or is it this carriage rights beef?

I think longer term, it's got to be the writer and actor strike because they are the backbone of your content creation. Again, right now, we are, 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, you know, video this weekend surfaced of Aaron Paul, who's one of the two co-lead.

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, since I was on Netflix before it was even O-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. Not Mr. Paul, of course. I don't think he's suffering. He's got his gambling as. He's got other shows he's done. But I like the fact to see that he's, you know, kind of standing in solidarity with lower, lower paid folks in his industry as well. But, you know, that there are,

that he's getting no benefit from the continuing popularity of that show, whereas in previous iterations when it would, you know, syndication shows, you know, the actors on Star Trek would get, or Seinfeld would get paid when they were going into syndication. You know, I, I, 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. And they're angry and I think they're scared.

And I understand why. And I think that, and again, you put that against the backdrop of the industry of 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 people, players in this space, I'm including corporate as well as individual. I think a lot of players in the space are probably going to have a radically different world when the dust does settle. I also don't see how they, 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 will be on. Well, of course not, because when you see the streaming data for the aforementioned breaking bat on Netflix, I think it'll be pretty good. And Brian Cranston and Aaron Paul will have a pretty decent argument saying, you know, where's our cut? Yeah, maybe not secret invasion on. 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 percent commissions. Wall Street Journal has reported that DoorDash has had 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 percent markup. Jim, what do you think this dispute says about DoorDash? Well, it says that they're willing to throw their weight around. I mean, I think if we're going to go for a theme from today, it's going to be companies or 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, I hold, we've talked often about David Gardner has the snap test. You know, if you snap and the industry disappears, how does the world look? What is the, what's the fallout kind of thing? So if we snapped away the internet, just we snapped our fingers and 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, they're a 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. Okay? So 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 percent higher than what it would be if you'd walk into the store. Like, why do you hate your money? But, you know, look, I get it. I understand why DoorDash is throwing around, but I've always looked at, I'm very fond memories.

No, not very fond. I have fond memories of when DoorDash IPOed briefly, it was valued higher than FedEx in terms of market capitalization. And I said, oh, that makes complete sense. One of them is a global network that can get you anything anywhere, any time, 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. it 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 like 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 just look at the, I'm kind of, I'm a very cash flow guy. And, you know, so I took a little bit of look at these things.

I think the, 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, looks pretty good. I would gues estimate free cash flows like, you know, in the range of $625, $630 million. But you realize that $5, $5,000. 140 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.

So, 627 million is my number of the cash is generated, but 541 million of that's SBC, stock-based compensation. So that's, you got to pay, 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. So it'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.

So it's not impossible that a year from now we'll be talking about how they've cash generations been basically zero aside from SBC. And of course, over the last year, they have spent $1.1 billion on share buybacks. This is a $33 billion company, by the way. We 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. So basically, that's not free cash flow that this company is made so much as it's deferred

compensation expense for insiders. And 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. Topics free for a reason. You're provoking the bear. I got it.

Yeah. It's the day after Labor Day. And, you know, 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. So, open floor. Right now, the overnight rate is 5% in Canada, 5.5% in the United States. What's a story of your company you're watching a little bit more closely in a higher interest rate? 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 to throw in the inverted yield curve and whatever else. And we've been talking about, you know, 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 their 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 it looks at least here in Canada, it looks like we just had a, they just had Q2 GDP come out last Friday. It was surprisingly down. We do have, 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, you know, rates have been very, like, 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. And the big Canadian banks, usually when rates are going up, you know, you're expecting a spread and you expect good things for the banks. But the problem is they're lending here as kind of problems. And 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. They're borrowing. And we've got a nascent housing crisis here as well. Good thing. No one borrows for houses. So what this has done is kind of steadily driven down the Canadian banks as we've got these higher interest rates.

And so 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%. The average forward valuation, forward PE ratio is nine and a half. The average price to book about 1.34. And these are valuation. levels, certainly on the forward earnings thing as well as a little bit on the price to book. These are kind of, we're kind of getting to levels where in the past 30 years, we've seen valuation levels like this three times.

Once in the first half 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. And I believe you said before the show, Ricky, that what's common there is bubbles popping and problems arising. And that's kind of where the valuation are. Another 10%, maybe in the valuation or less in a couple of cases were there. And historically, buying at those valuations, if you can buy it, sit down, put them away for

the next three to five years or more longer. Those valuation levels, those were really fearful times to be buying a buying bank. shares and they're also incredibly lucrative times to be buying by shares. So if history is a guide, I'm looking at these numbers going, eh, you know, there's not 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 Woolard caught up with Robert Brokamp to check in on the bond market. Okay. So we know higher rates. And the thing about higher rates is they mean different things to different types of investments.

So we're kind of going to break it down a little bit. Let's start with the easy stuff. So for years, holding your money in savings was not great. It's changing, and that's good news. So how should we think about holding cash right now? Should we be following those interest rates? Yeah, so that definitely is the good news about higher interest rates. We're finally getting some return on our super safe money.

So 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 check-in counts. 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. So when you're thinking about, like, where should I put your cash?

Think about how important FDIC insurance is, that type of safety is. So 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 have. A lot of people have speculated on what 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? Yeah, 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, right? In normal times, when the yield curve is upward slipping and not inverted, you might do like a bond ladder, right? 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, right? We know, especially from this century, that whatever certain events can happen, that can change interest rates immediately. 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, 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 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. Okay, so short and intermediate. What about bond types? Right, and there are lots of options out there. And 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 like the three- and six-month treasury bill. Plus, treasuries are free of state and local income taxes. So if you are investing outside of retirement account and you're like New York or California, it makes it even more compelling. So 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? And 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 them 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, municipalities make sense, because municipalities are free of federal taxes. And 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 are in a higher tax bracket, municipalities 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 are 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 they're going to lower tax bracket. So the after-tax yield is what you're going to be. you're looking for. In fact, if you look online, you'll find calculators that are called sort of like tax equivalency yields, and it'll help you determine whether, given your tax bracket, a municipal or a corporate or a treasury, makes sense for you. Interesting. So, 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, like, an ETF in the stock market.

Is it a good idea to use bond funds? Does that sort of, like, cut through the confusion, or any risks there? So I would say normally it does, right? Because buying individual bonds can be complicated. It's very different than buying individual stocks. So 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. So 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 okay 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, has 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. So if you look at one of the biggest bond funds of the world, the Vanguard Total Bond Market, ETF, according to Morningstar, the weighted price of the bonds in that are trading for 90 cents on the dollar. They're trading at a discount. And 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.

Okay. So, within the bond fund, do you have short-term intermediate, and you have the different types of bonds as well? Yes. And it is important to look at what's inside a bond fund or a bond deed. To make sure you understand what you're buying. So we've talked about the different, you can buy funds that just invest in treasuries, just in municipal, just in corporates, just in junk bonds, which are corporate bonds, but issued

by companies that don't have the greatest ratings. 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 iBonds a little bit because I listened to your show with Dan Kapplager on Motley Fool Live. And Dan was all in on iBonds earlier. Now I know the rates have gone down a little bit. How should we think about iBonds now?

Yeah, iBonds were the hottest thing going about a year ago, right? because, first of all, they are, 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%. So, I mean, how can you beat that, right? Here's the thing about eye bonds. It's actually 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. So because inflation has been coming down, if you were to buy an eye bond today, the yield would be 4.3%. Not horrible. No. But not as good as 9.62%. And the fixed part of that is only 0.9%. So if you were to buy an eye bond today, the way to think about it is, for as long as I own this i bond, I will earn whatever inflation is plus 0.9%.

For that reason, I think actually 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. So a five-year tips is yielding about 2%. So you are guaranteed, as long as you buy it apart and hold it to maturity, to beat inflation by 2%.

Again, safe as investment in the world, and because it's a treasury, it's free of state and local taxes. So 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 401K. 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. Okay, so 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? Well, I'll just use the famous quote from Warren Buffett, and that is, rates are like gravity to asset prices, right? So, if rates go up, it's generally not good for stocks, right? 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 kind of 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. So generally speaking, it's not great, but it really does depend on what kind of stocks you own. So 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 really down about 2%. But that's just sort of a generality. And 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 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.