WSJ What’s News - Why Cash Cows Are Wall Street’s New Darlings

Episode Date: February 12, 2025

A.M. Edition for Feb. 12. WSJ columnist Spencer Jakab says a new twist on value investing is turning attention to companies returning gobs of cash to shareholders. But does that mean growth is dead? Plus, Elon Musk defends his government cost-cutting drive as President Trump hands DOGE more authority. And the WSJ’s Jason Douglas explains which countries are likely to bear the brunt of reciprocal tariffs promised by the president. Luke Vargas hosts.  Sign up for the WSJ’s free What’s News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

TD Direct Investing offers live support. So whether you're a newbie or a seasoned pro, you can make your investing steps count. And if you're like me and think a TFSA stands for Total Fund Savings Adventure, maybe reach out to TD Direct Investing. Elon Musk defends his government cost-cutting drive from the Oval Office.

Plus, with President Trump poised to impose reciprocal tariffs, we'll look at what the measures might look like and which countries they'll target. And our investing columnist explains why cash cow stocks are having a moment. People are exasperated by how expensive the average stock is, and so they're looking for some way to stay invested in the market, but according to a formula that is likely to have better odds of success. It's Wednesday, February 12th. I'm Luke Vargas for the Wall Street Journal.

And here is the AM edition of What's News, the top headlines and business stories moving your world today. We are exclusively reporting that days after taking aim at the Consumer Financial Protection Bureau, President Trump's advisors and allies are discussing ways to curtail and combine America's bank regulators without involving Congress. According to people familiar with the matter, that includes the possibility of collapsing the Federal Deposit Insurance Corporation into the Treasury Department or combining the FDIC's regulatory role with the Office

of the Controller of the Currency under Treasury. In any plan that advances, significant job cuts are likely at the bank regulators. Bank executives have been saying for years that their industry suffers under too much regulation, arguing that other industries are encroaching on their business without Bank executives have been saying for years that their industry suffers under too much regulation, arguing that other industries are encroaching on their business without facing the same regulatory hurdles. According to our reporting, execs from some of America's largest commercial banks are set to meet with members of Congress, bank regulators, and nominees this week.

President Trump is handing Elon Musk's Department of Government Efficiency expanded authority Please join me in thanking the president for his support. And I'll see you next week. President Trump is handing Elon Musk's Department of Government Efficiency expanded authority to reduce the size of the federal workforce.

In an executive order yesterday, Trump directed federal agencies to restrict hiring to essential positions and gave agency heads 30 days to report on whether their agencies or sub-agencies could be eliminated or consolidated.

Standing beside Trump at an impromptu Oval Office press conference, Musk defended his cost-cutting plans against opposition from Democrats and legal challenges that have stalled some of his efforts. Well, we have this unelected, fourth unconstitutional branch of government, which is the bureaucracy, which has in a lot

of ways currently more power than any elected representative. And this is not something that people want. And it does not match the will of the people. So it's just something we've got to fix. For his part, Trump again criticized judges who've blocked some of Doge's steps to reform the federal bureaucracy, but said he would abide by court rulings and appeal decisions if needed. Meanwhile, President Trump's trade agenda could soon take a major step forward with reciprocal tariffs on countries that have imposed levies on U.S. exports that could

be announced as soon as today. And the move, expected to come via executive order, could go beyond simply matching other nations' tariffs, potentially taking into account non-tariff trade barriers, according to people close to the president. Journal Asia economics reporter Jason Douglas told me how reciprocal tariffs are likely to go over. So for countries like India, like Vietnam, like Brazil, Argentina, on the face of it, this is kind of a relief in a way because after all, one of President Trump's other

plans that he had floated was a 10% tariff on all imports into the U.S. Just because of the way these average tariff rates work out, under a reciprocal plan, it is possible that on average, many of these places might actually end up facing tariffs that are slightly less than 10%. But having said all that, the devil is in the detail, right? For some products, these levies are a lot steeper. Lots of countries charge very high levies on things like agriculture, on cars, and so they could face much steeper levies if Trump reciprocates on those specific products. Aaron Powell And Jason, should Trump choose to target non-tariff trade barriers? It's

a whole other ballgame. Jason Brennan Yeah, that's right. Non-tariff trade barriers include things like regulation, subsidies to domestic industries, tax treatment, this kind of stuff. And that is much more of an issue for developed economies, particularly places like the EU where people in the administration complain that there are all sorts of barriers facing U.S. companies and there's a complaint you hear from the U.S. business community often as well. Exactly how you translate a non-tariff buyer into a reciprocal tariff, I'm not entirely sure but if they're going after non-tariff barriers as well, then plenty of developed

countries could find themselves in the firing line too. That was journal Asia Economics reporter Jason Douglas. We are exclusively reporting that Federal Aviation Administration officials are considering a move that would permanently keep helicopters away from commercial jets taking off and landing at Washington's Reagan Airport, part of a broader plan to improve safety there after a US Army helicopter collided with an American Airlines plane last month, killing 67 people. For now, helicopters are temporarily barred from the flight corridor that was used by the Black Hawk involved in the January 29th incident.

According to people familiar with the investigation into the crash, preliminary indications point to multiple factors that could have contributed to it, including the design of the airspace, as well as actions by the helicopter pilot and air traffic control. Coming up, move over, Mag-7. Journal investing columnist Spencer Jacobs says a new group of stocks is making waves. We've got that story plus the latest in markets after the break. Are cash cows the new kings of the stock market? WSJ investing columnist Spencer Jacob says that companies returning lots of cash to shareholders have some newfound swagger on Wall Street lately and he's here to talk about why. Spencer, before we get deeper into this, in your latest returning lots of cash to shareholders have some newfound swagger on Wall Street lately.

And he's here to talk about why. Spencer, before we get deeper into this, in your latest column, you bring up the concept of value investing. Just remind us of what we mean when we talk about that. Yeah, so value investing is pretty simple, but pretty hard to do. Value investing is basically buying something cheaply. So paying 80 cents for a dollar. That's what made Warren Buffett very wealthy. That's what made his mentor, Benjamin Graham, very wealthy. It's basically buying companies that are cheap, but the real trick is cheap how,

and how do you know they're cheap, and how do you know they're not gonna stay cheap. And that's the really hard part. And also it requires a lot of patience, obviously, because you're not owning often the latest high flyers when you're a value investor and You may underperform for a long time Well speaking of high flyers you write about how the magnificent seven stocks like Nvidia and Apple seem to have Rewritten the rules of the game leaving the concept of value investing looking a little outdated. That's right

I mean if you go back to as far as the 1920s and 1930s, people began to understand that if you looked at a company's financials and you said, you know, this company, if broken apart or in terms of the money that it's paying out in earnings, is very cheap compared to other companies and you owned mostly companies like that, you did pretty well. But it wasn't really defined by academics until decades later. And the definition that they used was price to book values. They looked at the assets and the liabilities of the company and they said these companies, if broken apart, are really cheaper than what they cost on the stock market per share.

But as soon as they wrote that, the economy already was undergoing rapid change. And today companies, especially tech companies, have a lot of value that really can't be described on the balance sheet or isn't captured by the balance sheet. Things like know-how and brands and patents and things like that. So Microsoft, for example, doesn't look like a value stock. So it's done very well the last 10-12 years, but it might not have been picked up according to those traditional value formulas. So now there are some new formulas out there, including some trading under ticker symbols that seem thoroughly modern, like cows with a Z. Totally, yeah. And there are others out there too that all more or less have the same formula where they're trying to buy companies

that are cheap relative to their free cash flow. That's the money that's left over after your expenses and after any investments you need to make, divided by what's either your market value or your enterprise value. And so that's the kind of smarter way to look at a company's, what it fetches on the market. And it's a very simple formula, very easy to calculate, but has had tremendous success

if you look back just even the last 10 years. Success and ETFs that follow this approach keep on launching. What does that tell us? Is it a sign investors might be looking to hedge in some way? If you look at the most popular ETFs and funds, they still are the funds that really try to shoot the lights out. The things that either track the S&P 500, which has done really well, or QQQ, which owns the NASDAQ 100, that portion of the market that's had excellent results. But these also are gaining a lot of traction under the surface. People are exasperated by how expensive the

average stock is. And so they're looking for some way to stay invested in the market but according to a formula that is likely to have better odds of success. Do we know how this strategy would perform in a downturn? Well we do have some inkling I mean you never really know but some research recently came out of S&P Dow Jones indices where they reconstructed a free cash flow type index and according to their research, its excess performance was greatest during times of slowing growth and rising inflation. So in other words, it especially shines during bad times. Nat.

Is there a risk associated with this approach that we haven't mentioned here? And I guess a related question, isn't there a case we made that cash is best reinvested back into the business to yield longer-term returns as opposed to kick back to shareholders? Yeah, that's a great question because there's also this notion of compounders. And if you look at people who see themselves more in the Warren Buffett mold these days, that's what they're looking for. So not necessarily companies that are paying out lots of cash or using it to pay down debt or whatever, but companies that have such profitable opportunities that they can reinvest it and then their business will grow and make up for it. So that's also a very desirable type of company and is likely to be missed by this formula.

Spencer Jacob is the journal's investing columnist and writes our Markets AM newsletter. Spencer, thank you so much. Hey, thanks for having me. And in business and markets news today, Spirit Airlines says it plans to push on a loan after rejecting the latest takeover bid from its on-again-off-again suitor Frontier. Spirit, which filed for bankruptcy in November, has a hearing to consider its reorganization plan scheduled for Thursday and expects to emerge from Chapter 11 in the first quarter. Shares in Lyft are slumping in off-hours trading after the ride-sharing company warned that

a pricing war with Uber would slow Booking's growth. Lyft said its results will also be hit by the end of a long exclusive partnership with Delta Airlines, which recently tapped Uber for a new deal. And on deck, we'll get the latest read on inflation today with the consumer price index for January due out at 8.30am Eastern. Economists are expecting it to show a 2.9% increase from a year earlier, the same rate seen in December. And it's another busy earnings day with Cisco, CVS, Robinhood, and Kraft-Heinz all set to report results. And that's it for What's News for this Wednesday morning.

Today's show was produced by Daniel Bach and Kate Boulevant with supervising producer Christina Rocca and I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. Until then, thanks for listening.