We recently learned that Berkshire Hathaway (BRK.A 1.21%) (BRK.B 1.12%) sold shares of three of its major stock holdings. Is Warren Buffett losing faith in these investments, or is there more to the story? And we recently found out that some of our favorite fintech companies like PayPal (PYPL 0.20%) will be participating in the $350 billion Paycheck Protection Program.
Finally, host Jason Moser and Fool.com contributor Matt Frankel, CFP, answer some listener questions and discuss why they're watching JPMorgan Chase (JPM 0.80%) and Live Oak Bancshares (LOB -0.42%) this week.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on April 13, 2020.
Jason Moser: It's Monday, April 13. I'm your host, Jason Moser, and on today's Financials show, we're going to take a look at fintech's growing role in the coronavirus response. We're going to dig into why Warren Buffett is selling stocks, and we got some listener questions to get to as well as some stocks that we're watching here for the coming week.
Joining me, as always, Certified Financial Planner Mr. Matt Frankel. Matt, did you have a good weekend?
Matt Frankel: Pretty good. I'm about a month past needing a haircut, so other than that, I'm doing all right. I'm getting close to letting my wife buzz my hair.
Moser: You know, I think we're all probably getting to that point. [laughs] I was thinking at one point, it actually crossed my mind to take my beard trimmer to my head, but then I thought, maybe that wouldn't be the best idea. I think that might result in a broken beard trimmer, so I'm just going to kind of just kind of let it go until we get back to work, you know, whenever that may be.
Frankel: Yeah, I'd appreciate any home hair-cutting tips our listeners might want to tweet at us.
Moser: Yeah, absolutely. We'll make sure to get that email address and Twitter for you out there [laughs] by the end of the show for you.
Well, let's jump into really the lead story today. This is some news that broke over the weekend, and it's not really a surprise. We were hoping this would materialize. But the news came out over the weekend that PayPal and Intuit, among others, have been approved by the small business administration to take part in the paycheck protection program, and that PPP, that program that has been one of the government's responses to really try to help small, medium-size businesses and larger businesses, I guess. The businesses that need it the most to help them cope with what has obviously been an unprecedented, at least for our lifetime, type of shutdown of the economy.
And you know, Matt, when I saw this news break over the weekend, I thought, finally, I mean, this is good. I was excited to see it. Not even from a shareholder perspective, but just from that I use these tools an awful lot, whether it's PayPal or Square, we know the benefits that these fintech companies provide to consumers from a liquidity perspective, from the perspective of access to funds, how quickly they're able to turn. So for me, personally, I saw this news, I was pretty excited about it. I don't know, what do you think about this?
Frankel: Yeah. Well, I mean, these companies have been lobbying to be included on this since pretty much before it was even signed into law. So it's a natural fit, it's kind of my take on it. It's not, they're going to be a giant money maker. I mean, I think these loans have what, 1% interest, maybe a small origination fee, they're not going to be big cash cows. I mean, banks are making a whole lot more loaning on autos and mortgages than they are on this. But it's a real natural fit.
I mean, PayPal, obviously, has a great relationship with millions of small businesses, especially those that primarily operate online. You know it's like the leading online payment company. Intuit has got QuickBooks, so they have a lot of insight into payroll figures. And the whole small business, the PPP loans are all based on payroll figures, they're meant to keep payroll going. And that's a part of the loan that could actually be forgiven.
And Square is the latest one. We're starting to hear rumbles that they're being included in this. And I checked, and it's not official news yet, but Square has a payment-protection program part of its website up already that pretty much indicates that they're going to be accepting these types of loans through Square Capital. So not only do they have the Square Capital lending division, but Square, obviously, has relations with millions of, I think, it was well over 2 million small businesses in America that use Square services. So it's a natural extension, I would say. And these companies are really good at getting money places fast, which is important.
Moser: Yeah. And to your point about Square, Jack had fired off a tweet back on April 10 that just said, "Simple and fast instructions on how to get your $1,200 stimulus check from the U.S. government. And, yes, you can deposit it directly to your cash app for instant use, no bank account needed." And we had noted on a show previously that he was getting out there on Twitter and saying, "Hey, listen, U.S., this is what we do. We're really good at this type of thing, let us help." And so, it's really nice to see, because I think you're right. I mean, on the one hand, this isn't some big cash cow for these companies. It's not like they're going to make a ton of money doing this, but that's really not the point. I mean, they're being seen as the solution. I think it's one more link in the chain toward this idea that they really are part of the future of our banking system. These are essentially banks of the future, I think, right?
Frankel: You've actually brought up a really good point that they're letting people deposit their stimulus checks right to the cash app. I think that could be the biggest benefit to Square in this. Thousands of dollars coming into the cash app right after they launch their investing platform, remember, could eventually be a nice little catalyst for that.
But, no, these companies, they need to be part of the solution. The brick-and-mortar banks are. We've talked about it. I love Bank of America, I love Wells Fargo as a business, but they're historically inefficient at getting money in the hands of consumers fast.
So these companies need to be part of the solution, because when it comes to the cash burn that some of these small businesses are seeing from keeping their payroll going, like, time is a factor here.
Moser: It is. I'm glad you said that. That's a keyword, I think, is time. And that's what this really all boils down to is, we're just trying to buy time. Because as we've talked before, what's going on right now, this isn't a fundamental flaw in the economy. What we're seeing right now is something well beyond the economy. There's a public health issue. And so, I think the response, generally speaking, has been the right. You have to shut things down to the extent that you can. And to see our government getting out there and utilizing tools they can to buy as much time as they can, because that's ultimately what we really need, it's encouraging to see.
And we've talked before about companies like PayPal and Square. And while all of these companies are withdrawing guidance and they really don't have any clarity as to how revenues are shaping up for 2020, it was a pretty safe assumption that there are going to be fewer dollars flowing through their networks for the foreseeable future. Just due to the lack of commerce, due to the fact that all of these businesses were closed and people aren't spending money quite the same way. This certainly counters that at least a little bit. It does help make up for some of those lost dollars flowing through their networks now that they're able to participate.
Frankel: Right. The whole point of the stimulus was to not necessarily replace all lost economic activity but to definitely give the economy a bigger shot in the arm than it would have otherwise, especially with the stimulus payments. But the small business lending, this is going to go to payroll, this is going to go to paying vendors to keep the business going. It's money flowing through the system.
As earnings season really kicks in over the next few weeks, we'll start to see how much this has affected PayPal, Square, and this could definitely keep money flowing through their platforms much more than otherwise would have.
Moser: Yeah. And I feel like there's some brand equity that they earned from this, probably boosts the switching costs somewhat. I think it really does, sort of, solidify these companies and their status, the role that they play in our economy going forward. I mean, the one thing -- every bull has its bear. Is there a downside to these companies doing this? Do you feel like there are risks involved here that we should be concerned with?
Frankel: Well, not really. I mean, I mentioned these aren't high-interest loans, but the flip side of that is that they are guaranteed by the Small Business Administration, which essentially takes all the risk off the lender. In this case, I don't think the lenders are retaining any of the loans. I know with the Fed's new lending initiative, has nothing to do with this, I think the banks keep 5% of the loan and sell 95% back to the Federal Reserve. There's no split in this case. The banks are just going to get some interest, they're going to maybe get a little origination fee. Not a ton of money, but not a ton of risk either.
Moser: No. So yeah, not a lot of upside, maybe not a lot of -- I mean, not a lot of obvious upside, but not a lot of obvious downside either. It does seem like just a great, sort of, long-term catalyst for these businesses, really solidifying their role for the future. And ultimately that's what investing is, investing is about how we view the future. And I think that for a lot of us, we feel like companies like Intuit and PayPal and Square and the like are going to be a big part of the future. And so, it's certainly nice to see them participating in this.
Let's take a turn here and talk a little bit about this Warren Buffett guy, because we talk a lot about Buffett and Munger and Berkshire. I mean they are our north star in a lot of ways as investors. And it's been very interesting to see, in all of this chaos, what he's been doing. Now, you published an article about this on Fool.com today, and so I want to jump into it from that perspective, because Buffett is making some interesting moves here. And there are three key moves that you were focusing here on, and it sounds like selling is the theme here for the most part.
Frankel: Right. Well, first of all, I apologize if anyone hears my dog growling in the background. These days there is someone literally walking by my house every 10 seconds.
Moser: [laughs] We're just adding the personalized touch during the coronavirus crisis.
Frankel: [laughs] But anyway, to bring back to that point, two of the three big moves Buffett has made have been sells. But before you take the word "big" there with a grain of salt. The first one, he sold shares in two of the major airline stocks. They own Delta and Southwest. And the third is he sold about $30 million worth of Bank of New York Mellon shares.
Now, let's start with the airlines. Buffett owns shares in all four airlines, and here are the percentages. He owns just under 10% of American Airlines, 9.2% of Delta, 9.9% of Southwest, and 8.8% of United. So those percentages are not accidents. It's not desirable to own more than 10% of any company; it creates more regulatory requirements. Once you own over 10%, you have -- the whole reason we knew about these transactions is only because they own more than 10% and had to disclose it. So it's not that desirable. So these were relatively small sales, and they brought both positions just under the 10% threshold. So my gut is, that's why.
On the bank side, a $30 million sale of a $3.3 billion position is nothing. [laughs] It is the first key point. And this is another kind of 10% thing. Bank of New York, Buffett didn't own more than 10% of this up till recently. They owned about 8.5%, as at the end of the year, but Bank of New York has been buying its shares back until the coronavirus crash, had been buying its shares back at kind of a breakneck pace, a rate of about 10% per year of their stock. So that 8.5% stake crept over the 10% threshold, through no fault of his own, so this looked like he was just paring back the stake a little bit to get under that. Because a bank, especially, is not very desirable to own more than 10%, unless you really want to have an active role in the business, which Buffett really doesn't. He has no desire to run Bank of America. He wants to invest in it, or Goldman Sachs or any of those for that matter.
So this is one of Buffett's bank positions. This is one of, I think, his favorite bank stocks out of all his bank positions. And like I said, he sold less than 1% of the position. And the two key dates to know with Buffett, I don't think he's selling stocks at all other than for regulatory reasons right now. The two key dates to know are the Berkshire meeting that comes up the first week of May, the first Saturday of May. When we get Berkshire's latest earnings report, we'll get a glimpse at how much that giant cash stockpile has changed.
Remember, Buffett ended the year with $128 billion worth of cash. We'll get a nice little glimpse of where that changed. And with no big purchase announcements, if that dropped to say, like, $70 billion or $80 billion, we'd pretty much know he's been buying stocks. Though, you're not going to get a glimpse at what actual stocks he bought until the second important date, which is when Berkshire's 13-F filing with the SEC comes out, which happens May the 15.
So that always happens 45 days after the end of the quarter in question. So we'll see what Buffett did in the first quarter then. So when you look at these, you'll see headlines, oh, Buffett is selling all his stocks and things like that, nothing could be further from the truth. These are minor sales, they brought all three positions down under a key threshold.
And by the way, the third thing, where I said, the third move Buffett made, he's actually raising money on the European debt markets where he can borrow for literally 0% in Europe. So even if they can earn a 2% or 3% return on that money, it's kind of a no-brainer.
So not only did Buffett have $128 billion in cash, but it looks like they're raising more money for presumably investment purposes. So we'll see when these things come up, but don't make the mistake of thinking that Buffett has given up on the stock market or thinks it's going to crash more, any of those, you know, sky-is-falling headlines you read with this.
Moser: Yeah. And for listeners who want to check that article out, we will make sure to tweet that out on the Industry Focus feed today. That was a really great take there, Matt. I appreciate that. And before we continue, a reminder for those of you looking for more stock ideas, that now is a great time to check out our Stock Advisor service, where you'll get stock recommendations from David and Tom Gardner every month, Best Buys Now, and a whole lot more.
Why is it a great time? It's a great time because if you go to IF.Fool.com, you can take advantage of a special 50% discount that we have for our Industry Focus listeners, that's right 50% discount for all of you awesome listeners, who keep chiming in there with so many kind words during this time. We really appreciate that. So make sure to check it out: IF.Fool.com.
Okay, Matt, let's jump into a few listener questions here. We had a listener that reached out to us on Twitter, we got a couple of emails that I thought would be fun to hit on today. Now, this first question we got from Derek Main, a friend of ours, he reached out on Twitter. And this is right up your alley, Matt, so I'm going to look forward to your answer here.
Derek asks, he says, "For my portfolio management class... " and Derek is at Clemson University by the way, so shout-out to Clemson out there. Even though I went to Wofford, I'm not going to hold that against you, Derek.
Frankel: I went to Carolina, which is the direct rival, so.
Moser: [laughs] And my wife went to Fermont. So we've got the bases covered. But Derek says, "For my portfolio management class, we're doing a stock-picking project, and I got assigned REITs, which is nice, because they're easy to identify, but on the other hand, they're a lot different from normal stocks. My initial screening was small- and mid-cap, with anything under 100% payout ratio, just to cut the list down, which got me to around 25. Any suggestions on what would be some of the better metrics to use for screening REITs? Once we get down to the final three, we do a thorough analysis of each one, but I'm trying to figure out the best parameters to work with. I was thinking about using either debt-to-equity or return-on-equity and return-on-assets. Any thoughts?"
So Matt, you're our REIT guy here, you study these things all the time. What do you feel like some of the better metrics there for screening REITs?
Frankel: Sure. Well, debt-to-equity is OK. My favorite debt metric with REITs is called interest coverage, meaning, how many times does the company's earnings cover its debt obligations? In other words, if it pays out, if it costs $200 million a year to make its debt payments and it's earning $1 billion, then it would be 5X interest coverage. So that's a good one to look at if you want to go the debt route.
With REITs, I like to look at 10-year dividend growth history, especially if that 10 years -- which it doesn't anymore, but, well, actually, now it will -- includes both a bull market and a bear market. You want to see how a REIT raises its dividend, which is a great indicator of financial health, if it can keep raising its dividend year after year. But you want to see that it's able to do that in every market. So a 10-year dividend growth rate is a really good one to look at.
Like I said, interest coverage is good on the debt front. And, yes, so, that's kind of where I'm at with that, he's on the right track with under 100% payout ratio. Well, because remember, REITs have high payout ratios. By definition, they pay out almost all of their income. So make sure you're looking at the FFO payout ratio, but you're a Clemson student, I'm sure you're a smart guy, so.
Moser: [laughs] Yeah. No question there. And actually, as soon as this lockdown is lifted, I'm going to get to go down to Clemson and meet with Derek and students and teachers down there and talk more about stocks. So looking forward to eventually getting back down there. But I do like that the coverage ratio, that's something that's really handy to look at with, really, any business.
And you know, we talked about this a little bit on Motley Fool Money, it's really nice to look at that coverage ratio or look at how many times you can push that interest expense into that operating income or free cash flow number. And instead of looking at the trailing 12 months, I like your idea of looking at it over a long period of time and see how it covers both ends of the spectrum there. And also thinking about it going forward, what are some of these businesses, what are their finances look like over the course of the next year or two years from now? Because there are going to be some major disruptions. And so some companies I think would be a little bit more prepared than others.
We got an email from Heidi Gilroy, and Heidi says, "Hello! I love your show." Thanks, Heidi. "Thanks for doing what you do. I've been hearing a lot about stock buybacks. Can you explain why a company might go into debt to buy back stocks and why stock buybacks in general might be seen as negative? Thanks."
And thanks again, Heidi, a very good question there. Stock buybacks, in general, are always a good question. I do really love the angle there, why companies would go into debt to do that. And how do you generally view that, Matt, if a company goes into debt to fund buybacks?
Frankel: Well, if a company goes into debt to fund buybacks, that means they really think their stock is worth more than it's trading for. If your stock is trading for $30 a share and you just know that you have $50 worth of assets for every share, it could actually make sense to -- you know, you're borrowing $10 to essentially buy $20. So that's why.
As far as why buybacks are considered negative, they're portrayed that way a lot in the news and it all comes down to, 1, are the buybacks done responsibly? Meaning, is the company spending so much on buybacks that they have no so-called emergency fund, which is what we're seeing with the airlines. That's why we're seeing so much -- I forget which one said 96% of free cash flow was used on buybacks. That's a little excessive, [laughs] so.
But if a buyback is done responsibly and for the right reasons, meaning you're using 20% of your free cash flow to buy back shares that you think are worth more than they're trading for, there's nothing inherently wrong with a buyback. That's a very common way that companies return capital to shareholders. And actually, it has some advantages over dividends, being that, if a company pays you dividends, that's taxable income. If it uses that money instead to buy back its own shares, it increases the value of your investment, but then it doesn't produce taxable income for you. So that's the big advantage of buy backs.
I don't necessarily think it's a negative, but it can be used negatively, like most financial instruments.
Moser: Well, yeah, and it's been a real headline here lately because of this perception. There is some reality to it in that some companies are obviously in very difficult financial times right now. And you can look back to, "Well, they spent all this money on share buybacks, and now they have no money to be prepared for what's going on right now." I mean, there's a greater truth to that, right.
I mean, we've even seen companies that in normal times will buy back stock with excess cash and they've suspended those programs to make sure that they can look out for the stakeholders that matter most. I think we're seeing more and more this all stakeholders' mentality. Starbucks is a great example of a company that, you know, make it fund those share buybacks if they want, but the more important and pressing issue right now is to make sure that their partners, their stakeholders and employees, are taken care of first-and-foremost, because the company ultimately doesn't exist without them. I mean, they can start that share buyback program back up whenever they want.
I've never been a fan of a company going into debt to buy back shares, because to me, it seems almost a little bit too greedy. And there's a lot of data out there that just shows that companies tend to get buybacks wrong, they do tend to buy their shares back at pretty elevated levels.
I was always a big fan of Buffett's line that he drew, I think it was 1.2X or less than book value or something like that, where he would actually consider buying back. And now they've resorted to more of Warren's and Charlie's discretion, but they've also earned that goodwill, I think, with a lot of us too.
So yeah, share buyback is a very interesting philosophical discussion. We could probably have an entire show on that and still not really cover it all. But a very good question nonetheless, Heidi. Thanks so much for asking.
And we have one more question here from Roy Klazowski. Roy says, "Hey, there. I'm looking to take a trick out of the Jason Moser playbook and taking a basket approach to the emerging-market fintech space. I already have MercadoLibre and PagSeguro. To complete my basket, I'm looking into StoneCo and was hoping to add one more. Any suggestions? Thanks a bunch. Financials Monday is a can't miss every week."
Roy, thank you for those kind words. Really appreciate you saying that. And, hey, listen, you know I love the basket approach. The war-on-cash basket has been one that has worked out very well, but this sounds like Roy is looking for an emerging-markets war-on-cash basket, Matt, and he's got a few good ideas in there. Do you have one more for him?
Frankel: I know this is kind of a boring answer, but I think if you're looking for an emerging-markets payment basket, it wouldn't be complete without either Visa or Mastercard. Both of those are really pressing the cross-border payments, especially into emerging markets.
Those are countries where most people don't have credit cards yet, things like that. When credit cards start to take over Latin America, for example, they're going to have Visa or Mastercard logos on them. So I'd say the three you have are great. I love StoneCo especially, it's one of my favorites, but I don't think that basket would be complete without a Visa or Mastercard in there.
But since you're a regular listener, I'm inclined to believe you own one of those already. Just a hunch.
Moser: Probably so. I'll throw one, sort of, unconventional answer out there, because it's not necessarily a payments provider on its own, but Shopify is really interesting in that it gives you open access to Stripe. And while Stripe is not a publicly traded company as of today, and it may be down the road, no one really knows, I think we'd all love to see it at some point, but Stripe is the backbone of Shopify's payment processing. And so owning Shopify gives you exposure to that Stripe network. And Stripe is a Square-like business in the metrics that it's turning in, in the market share, and in the neat, innovative ways that it's approaching the fintech space.
So if you want to get a little exposure to Stripe, you could do that through owning some Shopify. And I'll tell you, as a Shopify shareholder myself, I'm very happy that I own those shares. And you kind of get a two-for-one there. You get the e-commerce play and you get the payments, all rolled into one, man.
Frankel: I like that call.
Moser: All right. Well, let's wrap up this week with our Ones to Watch. And earnings season is just getting ready to kick-off here, Matt. So what's your One to Watch this week?
Frankel: Well, in the spirit of earning season, I'm looking at JPMorgan Chase. They're the first big bank to report -- tomorrow actually. So I'll be watching that one. I like JPMorgan's business a lot. They're kind of on the forefront of most major banking trends. Just recently, we saw that they're increasing their mortgage standards to I think a 700 credit score to try to get ahead of the increased risk that comes with this.
Moser: I like that move actually a lot.
Frankel: I do. It's a necessary move. I'm curious to see what they have to say on the conference call about it maybe, and how it might affect the business. We're seeing homebuilders get absolutely crushed today, and I think that's a big reason why, because the banks are tightening up their lending.
And JPMorgan just has the ability to kind of set the tone for bank earnings. So that's one I'm watching this week. It's not in my portfolio yet.
Moser: Qualify that. That's cool. Okay, well, I'm going to actually go with a smaller bank. I'm going to keep an eye out on Live Oak Bank. And that's one that we've talked about before on the show, one I know that you know very well, Matt. And we were very fortunate to interview the president of the bank there, Huntley Garriott, on the show a little while back.
And just given their tech nature and given their Small Business Administration focus, their focus on supporting the small businesses out there, I'm just going to be really fascinated. They have earnings coming up on April 22. I really can't wait to read, to hear how they're seeing the current landscape, how they're able to help, what they've got planned for the near future here to be a part of the solution, because I do feel like that's a bank that is going to be a big part of the solution as well.
And I'll tell you, Matt, Live Oak is -- I only own one small bank in Ameris Bancorp (ABCB 1.58%), but Live Oak is, I like that bank a lot, I've got that on my watch list, Matt. I think about adding a few shares to my portfolio on that one, but we'll see. Earnings season is going to shape up to be a doozy, I'm sure. But, Matt, we really appreciate you taking the time out this week to join. I hope you had a nice Easter weekend with your family and everybody is staying healthy.
Frankel: We did. We actually got good weather up until last night, so we were very fortunate; we were able to play outside and stuff like that.
Moser: Good deal. We'll make sure to keep you guys in mind, and we'll see you next week.
And that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at IndustryFocus@Fool.com and let us know how things are going.
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. Thanks, as always, to our man Austin Morgan for keeping us on the rails. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.