The market is closed today, but that's not stopping us. There's plenty of company news to talk about, even if it didn't happen today. In this episode of MarketFoolery, Chris Hill and Bill Barker answer some listener mail: What does AB InBev's (NYSE:BUD) dividend cut mean in the big picture?
And that's all the investing stuff, but stick around for: Is James Bond a superhero? The guys pay homage to the late, great, and stupidly talented magician Ricky Jay. Chris laments passing on seeing Ricky Jay And His 52 Assistants live. Tune in for more.
A full transcript follows the video.
This video was recorded on Dec. 5, 2018.
Chris Hill: It's Wednesday, December 5th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: The market is closed today, so we're going to dip into the Fool mailbag. Let's just jump right in. By the way, you can always email us, firstname.lastname@example.org is our email address, as Tom George did. Question from Tom George. "Is the size of index funds becoming dangerous?" He included a link to a commentary from the father of index funds himself, John Bogle.
Barker: Bogle's article talks about not so much the returns to investors or any volatility, which is what index funds are sometimes spotted up as perhaps having a problem, given the concentration of certain stocks in index funds, but really on the voting power of shareholders and corporate governance. The trend is that there may soon be 50% of the market in index funds. Index funds themselves are highly concentrated in the three largest players -- that being Vanguard, State Street, and BlackRock. Then who's going to be exercising actual voting control over boards? That's what his article's about.
Hill: I understand the point that's being made, but I have to be honest, it takes something pretty extreme for me to say, "Well, I'm just going to ditch the index fund that I have with Vanguard as a result of that." I mean, just the vehicle itself, the low-cost option, in terms of corporate governance, I'm not thinking about my index fund investment in that regard. I will think of my own individual stock investments in that regard. If they're becoming dangerous, they're not becoming dangerous enough for me as an investor to say I want out.
Barker: No, and I don't think that the argument is that the index funds themselves will end up with lesser returns because of this, but more that the governance, and who is exercising voting control over the decisions of companies, where is that going? To his credit, John Bogle is not saying, "Oh, don't worry about it. Vanguard has 51% of the index market, and they're good people, so we never need to worry about them doing the right thing." His outlook is, "This is a potential structural problem, and one that people should be aware of."
There's no such thing as a free lunch. As great as index funds have been for investors, and the article itself points out, with approval, the description of, the 500 Index Fund is the most consequential or the best thing that's happened to investors. He's definitely positive on what has been achieved. In fact, the ability of investors to today, get for either virtually nothing or actually nothing in the case of Fidelity's new index fund products, a wide diversification for their investments at any moment, any time, comes with a cost. That is, as they become more and more and more attractive, the voting rights aggregate into fewer and fewer hands.
Hill: Question from Tom Smith in Antioch, California. This is from a few weeks ago. Tom writes, "I'm just wondering if you had any thoughts about Anheuser Busch InBev's announcement that they're cutting their dividend by 50%." I'm not a shareholder of AB InBev. I probably saw that headline, but it completely flew by me.
Barker: You're not even particularly a user of AB InBev.
Hill: I'm not even remotely a user of AB InBev, or any similar beer products.
Barker: I've got some thoughts. But better than my thoughts are the thoughts of Nate Weisshaar, our colleague at MFAM Funds, he follows the stock closely. It's not a good sign whenever somebody is cutting the dividend. Why are they doing that in this case? Because they made a miscalculation in racking up the amount of debt they did to make the acquisitions that they have of about $109 billion in net debt. And they've got to pay that off. There's not an immediate danger. They've got that debt stretched out over more than a decade. But in 2020, they do have a fair amount of it that's rolling over. So, it behooves them to get some of that paid. By cutting the dividend, they freed up a significant amount of additional cash a year to pay that.
But the original program was, "Hey, we've made these acquisitions. It's going to work out. We're going to be able to keep the dividend. We're going to be able to raise the dividend. And, we're going to be able to pay off all this debt." And that story has now changed.
Hill: I'm reminded first and foremost of General Electric, when the first dividend cut came earlier this year. What was basically said by everyone was, "Well, this is the right move." This may, in fact, be the right move for AB InBev, as well. But, to your point, yeah, I almost want to linger when that happens and say, "Wait a minute, let's talk about what led to this point." Even if it is the right move, and even if it works out in the end, someone really blew the math on this one.
Barker: Yeah. They blew it in the sense of trying to grasp where the beer market was going. People are, to a degree, exiting the beer market, or the at least the portion that Budweiser -- AB InBev is Anheuser Busch -- Bud and Bud Light are diminishingly relevant beers. As big as they are, as many Superbowl ads as they will buy, as much as we all care about Bud Bowl, nevertheless.
Hill: I was going to say, as much as we care this time of year about the iconic Clydesdales commercials for the holidays. Who doesn't love those?
Barker: Oh, sure. So, I was at an investor conference a couple of years back. I know I've spoken about this on the podcast, so I'll try to talk more quickly than I normally do, which listeners will be happy about. Anyway, this guy got up there, and he had 20 minutes to give the spiel. And mostly, what he talked about was the Budweiser commercials on the Super Bowl, as if this was a company that produces commercials which incidentally lead to the sale of beer.
Hill: [laughs] Wait, this was a Budweiser executive?
Hill: At an investor day? Just standing up talking about, "Look how great our ads are?"
Barker: It was, I think, a highly relevant item about "Hey, should you be investing in our company? Well, let me tell you about our ads on the Super Bowl. People really love them." Look, why else are people drinking Budweiser? They're drinking it because they grew up drinking it or because they are inundated with ads for it. So, it is a highly relevant part of the business, as it is for Corona. They've done very well with their ad campaign, or, had been doing well. There's beginning to be weakening in Corona and Stella. Look, it's a huge thing. People still drink a lot of beer. But a lot of the incremental beer-purchasing is going to higher-end micro-brews and things like that. The cut that is left for Budweiser is diminishing.
Hill: They're cutting their dividend, and on top of that, when you look at the stock, it's down about 30% year to date. You and I were talking the other day about J.M. Smucker, and I made the point that that stock is basically flat for the last five years. Compared to AB InBev, that looks phenomenal. That's tremendous outperformance.
And, by the way, say what you want about J.M. Smucker, they have steadily increased their dividend over that five years. If you're a shareholder, you're not necessarily getting the returns, but in terms of an increasing dividend, you have to be happy about that. On the flip side, if you're an AB InBev shareholder, that's got to be one of the top three reasons you own this stock.
Barker: Yeah. A lot of institutional accounts are investing specifically for the dividend and have as a thesis for why they hold the stock that it is going to be a growing dividend story. And that story is either over or temporarily halted or some variant of that, enough so that there are a lot of accounts that say, "We're no longer going to stick around." And that may well have created an interesting enough entry point that people can get behind. It's trading at the very bottom of its 52-week range. As you say, it's off substantially for the year. I'm not saying that all of this leads to a story that you wouldn't necessarily want to look into today, but it's had negative returns for five years.
Hill: Question from Alan Bishop. This is not related to investing, but it is related to the bonus episode of MarketFoolery that we dropped over the weekend.
Barker: Inflicted on people.
Hill: Yes. We talked about James Bond. Alan Bishop writes, "The segment on James Bond rekindled a debate my wife and I had several months ago. Is James Bond a superhero? Before you answer, consider: he has no superpowers, only years of extensive training in all types of spy-related minutia, tons of cool gadgets, and the full financial backing of the British government. Now, consider that Batman also has no true superpowers, only years of extensive martial arts training, tons of cool gadgets, and the financial backing of his parents' fortune. If Batman is a superhero, James Bond should be, as well. And if James Bond is not a superhero, Batman probably shouldn't be, either." It's a pretty compelling point that he's made there.
Barker: Though wrong.
Hill: Go on.
Barker: Well, as we discussed, for one thing, James Bond has no cape.
Hill: [laughs] There are a bunch of superheroes who don't have capes.
Barker: Not the great ones. But more importantly, he's a super spy, but he's not a superhero. He doesn't go around beating up of villains. If somebody's getting mugged, who's going to help him out? Batman.
Barker: Is James Bond going to? He's got to save the world. I mean, he's got big, important things to do. He is super. But he's a spy. He doesn't have time to help you get your kitten out of a tree or something like that. Batman might do that for you. Spiderman would. They have to do some local stuff. James Bond doesn't do anything that's street-level.
Hill: Also, James Bond is probably the best for his group. And by that, I mean, within MI-6. But there are different governments around the world that have their own version of James Bond. Whereas Batman, among his nicknames, "the world's greatest detective."
Barker: He has a different mandate. He answers to himself, whereas James Bond has to answer to the Queen.
Hill: Right. Specifically to M.
Barker: To M, but really to the Queen.
Hill: OK, that's fair.
Barker: Regarding origin stories, which we talked about at length on the bonus podcast the other day, I don't think that you could really do a James Bond origin story Netflix thing, but you could do the 00s. Extending the brand, I don't think anybody's going to want to go outside of Bond being in movies. If they were to do some sort of TV show of Young Bond or whatever, that would dilute the movie power. But the 00s are a bunch of other people. 004? Nobody's gone into that.
Hill: I was thinking you were going to the origin of the 00 program. In the same way that the book and the movie The Right Stuff is about the start of the space program in the United States, the start of the 00 program.
Barker: That would also solve some of the issues that some people have, like, "How about we have somebody black play James Bond? Or a woman?" Or something like that, because they want to see that diversification. And then there are those like, "No, no, no, this is my James Bond. He has to be white, English guy," that sort of thing. I'm not going to weigh in on that. But, 00. There are eight, nine other 00s out there.
Hill: There are nine.
Barker: You can do a lot.
Hill: You can. It's like the Supreme Court.
Barker: Yeah. I mean, a little bit edgier than the Supreme Court.
Hill: Yeah, nobody wants the origin -- The origin story of the Supreme Court, nobody wants that. The market is closed today for the funeral in Washington, D.C. for former president George HW Bush.
We were talking last week, the passing of not a president, but one of the more remarkable performers of the last certainly 30 years or so, and that's Ricky Jay. We meant to talk about this on the bonus podcast, we didn't. For those unfamiliar with Ricky Jay, he died last week at the age of 72. Someone who you may recognize in movies, particularly David Mamet movies, movies like The Spanish Prisoner and Heist and others. Best known as probably the greatest close-up magic performer in the world, in terms of being a sleight of hand artist. You can just do a quick Google search of Ricky Jay and find any number of tributes to him. Remarkable in the sense that he dedicated his life to this art. He would practice six hours a day for decades. We talk about Malcolm Gladwell and the 10,000 hours. Ricky Jay went well beyond that. He was this perpetual student.
Barker: Yeah. Go to YouTube, you can see through the magic of YouTube, maybe his best-known show, Ricky Jay And His 52 Assistants. The whole thing. And it's certainly not the same as being in a small theater. He did the show for a group of 60, 70, it had to be a very small number of participants, so they could really see the whole thing and feel the proximity. But you can watch it and get a taste for it. As you watch it, my experience is, just be baffled and not even try to figure out how he's doing anything, because it's so far beyond what I can pick up.
Hill: Did you ever see him?
Barker: Live? No.
Hill: When we were going back and forth on Slack after he died, I think I wrote to you that it's the biggest artistic-related regret that I have, in terms of like, "I had the chance to see this performer." For me, it's Ricky Jay. Ricky Jay And His 52 Assistants came through Washington, D.C. probably 20 years ago or something like that. I remember looking at that, "Oh, that looks great! How much are tickets? Oh, I don't know." And then the show was gone, and I made the mistake of thinking, "Well, if he's touring with the show, then he'll probably be back in a few years." Nope. That was the opportunity I had to sit among probably 60, 70 other people and witness his mastery up close, and I blew it.
Barker: We had a moment like that together, of going to see somebody who was the best in the world before we were unable to. Do you remember that?
Hill: Michael Jordan?
Barker: We went to see Michael Jordan. And it was not the same thing.
Hill: [laughs] It was not the same thing.
Barker: We didn't exactly have front-row tickets. That was a small part of it.
Hill: It was one of the last games he played. He was playing for the local NBA team. And unlike Ricky Jay, Michael Jordan was not at the height of his powers.
Barker: No. He was still a good basketball player on the court with other good basketball players. He was not somebody who embarrassed himself at the end of his career by hanging around too long. But he was not the Michael Jordan of six NBA championships when he unretired for the second time and came back with the Wizards. Still, it seemed like, "Hey, this is our opportunity to say that we saw Michael Jordan live." He only came into town once or twice a year back them, I don't remember what the schedule was exactly, then. Worth doing. But it was certainly not like seeing a master up close at the height of his powers.
Hill: Right, yeah. Ricky Jay, better at what he did than Michael Jordan was at what he did.
Barker: They just reaired on Terry Gross, Fresh Air, a competitor podcast to this one. ...
Hill: Yes, in the sense that --
Barker: Both are podcasts.
Hill: Both are podcasts. Terry Gross, slightly bigger audience than MarketFoolery.
Barker: But they reaired the Ricky Jay a couple of days ago, last Friday. Terry Gross, who I used to live next door to.
Hill: Until the restraining order?
Barker: Well, it was in an apartment building. She was in the next apartment over, actually. We had cats in our apartment, and one of them was particularly good at getting out whenever I was bringing bags in or something. I wouldn't notice that the cat would run out into the hallway, which he always did. And occasionally, Terry Gross had to come and knock on my door and say, "You know, your cat is roaming the hall, meowing by our door."
Hill: [laughs] Did you ever do anything to make it up to her? Like, "Here's a bottle of wine. I'm sorry about all the times you've had to remind me of this."
Barker: It was not my impression that Terry Gross wanted me to take the time to interact with her any more than to get the cat out of the way. That was good enough for her. And I was glad to do so.
Hill: You can read more from Bill Barker and Nate Weisshaar and all of the crew, the entire crew down there at MFAM Funds. Go to mfamfunds.com. Thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interests 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
[Hanukkah Waltz by Bela Fleck]