In this podcast, Motley Fool senior analyst Bill Mann discusses:
- Why he believes Abiomed is worth a "shock and awe" price.
- How Abiomed will strengthen Johnson & Johnson's medical device portfolio.
- Amazon expanding its ad-free music library for Prime members.
- Signs that the retail giant is gunning for Spotify, Disney, and other entertainment companies.
Also, Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp discuss how shortcuts can make you a smarter saver.
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.
10 stocks we like better than Johnson & Johnson
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Johnson & Johnson wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of September 30, 2022
This video was recorded on Nov. 1, 2022.
Chris Hill: We've got a big deal in healthcare and some budget shortcuts that anyone can take. Motley Fool Money starts now. I'm Chris Hill. Joining me today Motley Fool senior analyst Bill Mann. Happy November.
Bill Mann: Sure. If you say so. How are you doing?
Chris Hill: If November goes as well for the market as October did, I think I'm doing pretty well.
Bill Mann: I ended up having to buy a surprise new water heater yesterday, and I do love surprises in general, but a surprise new water heater that you have to pay for is pretty low on the list. Yeah, it was a good October. The markets were happy. I would have been less happy about my surprise new water heater at the beginning of October than at the end of October. So good news.
Chris Hill: Let's keep a good thought. We're going to start with the deal of the day and possibly end up being the deal of the week: Johnson & Johnson is buying Abiomed, a medical device company that makes heart pumps. This is a $16.6 billion deal, and Johnson & Johnson must have really wanted this company because they are paying a 50 percent premium on where the stock was previously. Based on the fact that shares of Johnson & Johnson are down only about half a percent or so makes me think that the market in general does not believe J&J is overpaying. What do you think?
Bill Mann: It was a "shock and awe" purchase price for sure. There are a couple of things here. For one, Johnson & Johnson is paying less than Abiomed's all-time high share price, which was in 2018. Not that there's anything magical about an all-time high, but you have a company that's been growing really quickly. Primarily, I think the thing that Johnson & Johnson wanted more than anything else was their Impella heart pump, which is billed as the world's smallest heart pump. The other thing, Chris, is that some of the performance for Abiomed has been back-loaded. If you notice all of the statements about this purchase were $16.6 billion up front. There are additional payments that they could receive should certain milestones be met moving forward. I think it's a pretty good deal for Johnson & Johnson, even though it is absolutely a big premium over last Friday's close.
Chris Hill: Are you surprised at all that they have made a purchase of this size? This is the biggest deal J&J has made in nearly six years. This comes at a time when they are preparing, they're in the process of getting ready to split the company. It's expected to happen in late 2023. But I'm wondering if on any level you're surprised that they took on this. Look, this is a big important company with a lot of moving parts, so it's no surprise that separating the company is going to take a long time. They're being very diligent and careful with that process. Adding a business like Abiomed has to complicate that if only slightly, right?
Bill Mann: I think it probably complicates it a little bit, but the CEO of the combined Johnson & Johnson is Joaquin Duato, and he's been very clear about the fact that as part of the separation between their consumer drug division and their medical device division that they want to beef up the medical device division. It's been an area that has not had a whole lot of growth, and part of the process of doing this has been to make this a much stronger division. They were pretty clear about the fact that they would be looking for bolt-on acquisitions. We need to be clear: $16.6 billion is a lot of money. It's a lot of cash, but it is still a pretty small fraction of the size of Johnson & Johnson now and Johnson & Johnson medical device division. I guess we can call that Johnson & Johnson & Johnson moving forward. It's not a huge acquisition for them relative to the size of the overall business.
Chris Hill: Let's move on to Amazon then. Because Amazon has increased the price of a subscription to Prime from $119 a year to $139 a year. This morning, Amazon made a couple of announcements aimed at signaling to people, hey, if you're a Prime member, we're going to try and give you more than we have been giving you. Amazon is expanding its library of ad-free music, and as a Prime member who uses that library, I appreciate that. I'm looking forward to searching up songs and albums and being able to access them rather than being told, this is only available for Amazon Unlimited members and you have to pay a subscription for that. I appreciate that. I think it's a good move. I'm a little confused by the other announcement, which is that Amazon, which has systematically moved into live sports programming to the point where it is now the sole place to find Thursday Night Football, Amazon is launching 12 hours of sports talk programming on Amazon Prime TV. I'm confused [laughs] What is your reaction to this? Because if you had told me that they were testing daily sports programming, I would say that makes sense. The fact that they're jumping in with 12 hours a day, that's the surprising part to me.
Bill Mann: It's amazing to me just thinking about this, and we've talked about that a little bit beforehand. How many different companies Amazon is going after with this one announcement? They're going after Spotify for real. They're going after ESPN, part of Disney for real. They're going after Paramount and CBS for real with this announcement. I think the ESPN model is probably most illustrative for where they're going. They've decided to get into this business. If they are going to be broadcasting live sports events, they may want to be looking for ways to broadcast live and tape commentary about it as well to keep people on the platform for as much as possible.
I'm with you. Twelve hours of sports commentary for me is about 11 hours and 30 minutes too much maybe. I think that there's something there and they're already doing this with the Premier League, for example, they've had absolutely fantastic, not just coverage of the sporting events itself. I'm always a little bit torn as to whether I should call it soccer or football, but let's go with soccer. We're in the United States. They've done a delightful job in adding additional commentary and additional features to their coverage of the Premier League. To me, it's not a surprising step. I'm not necessarily the audience, but I'm not necessarily not the audience either, though, Chris.
Chris Hill: You talked about the Premier League. Again, if they had made it more targeted and built specifically around the programming that they had, that would make more sense to me rather than, as you said, this is aimed squarely at ESPN.
Bill Mann: If you think about it, which is easier and which is cheaper to launch? Is it easier and cheaper to launch sports commentary? Or is it easier and cheaper to go out and buy the rights to broadcast games? I think probably they are attempting to get to the latter by doing the former. It's just not as expensive, not even for Amazon, they've got billions of dollars in cash. But buying rights to sporting events is a really big business and it's really expensive. For this to be built into Prime, you know what, Chris, as we're talking, I'm talking myself into how smart of a deal this is. This is brilliant. I don't know what your problem is. It makes sense to me from that standpoint.
Chris Hill: Well, it makes sense to you from an economic standpoint, maybe not a programming standpoint, and I hear the point you're making. Yes, it's absolutely much more expensive for them to go to the NFL and say, "Here are truckloads of money and we would like exclusive rights to Thursday Night Football," as opposed to going to presumably a showrunner. I'm assuming whoever is the Jimmy Pitaro of Amazon Prime, I'm assuming they've got that person to oversee all of this programming and I'm assuming whoever these people are hosting these shows, they're not making the dollars that Al Michaels is?
Bill Mann: No. At this point, I'm just questioning why you hate Amazon so much.
Chris Hill: It's fair. That's fair. I've been bearish about Amazon since the day I started, it's a fair criticism. Bill Mann, great talking to you. Thanks for being here.
Bill Mann: Thanks, Chris.
Chris Hill: Do you really need a detailed budget or can you take a shortcut? Alison Southwick and Robert Brokamp look at some common and lesser-known rules of thumb that can make you a smarter saver and spender.
Alison Southwick: Financial planning can be complicated. You have to figure out what to do about your budget, housing expenses, retirement savings, life insurance, college savings, and asset allocation, all while trying to manage a career and perhaps raise a family. Fortunately, the world of personal finance offers many rules of thumb that can at least get you started down the right path. Today we're going to talk about some of the most well-known and some not-so-well-known.
Robert Brokamp: Indeed we are, Alison, and I should point out that many experts really aren't big fans of these financial shortcuts, and I definitely agree that doing some full-fledged personalized analysis of all your money-related decisions is ideal. But that takes time and maybe money, especially if you're getting help from a professional. So with a handy-dandy standard guideline, you can at least get started as Larissa Fernand of Morningstar wrote, these rules of thumb, "lessen the psychological pressure and the decision-making processes while they are easy to follow and reduce choice complexity".
That's just a fancy way of saying that a rule of thumb is more likely to result in someone actually doing something rather than getting stuck in analysis paralysis. As we go through these very general guidelines, you got to use your fullest wisdom in determining whether they are good enough for your situation. And I also want to add that, however you make your decisions, it's still probably a good idea to check in with a fee-only financial planner every few years and right before major financial decisions, just to make sure you're on the right track.
Alison Southwick: For our first rule of thumb, let's start with the conundrum faced by every household. How to divvy up each paycheck between wants, needs, and savings.
Robert Brokamp: The most popular budgeting guideline these days has come to be known as the 50-30-20 rule, and it goes like this. Fifty percent of your after-tax income should go to necessities like mortgage, healthcare, groceries; 30 percent to discretionary purchases, things like entertainment and vacations; and then 20 percent to saving for financial goals. I think it's a fine guideline, though I personally would like to reiterate it to the 20-50-30 rule because it emphasizes that you should prioritize your savings first. If you're saving enough, then how you divvy up the rest of your budget really may not matter as much.
Though if you're spending more than half of your budget on essentials, that doesn't leave much left over for fun, but I know that's the situation for many middle-income families, especially in high-cost areas. Since we're on the topic of budgeting, I'll throw another guideline. The fact is most people actually don't budget because it could be tedious and time-consuming and it certainly makes sense to sit down and look at your expenses once or twice a year or so. But what you'll find is, frankly, that a lot of them are relatively fixed. Besides that annual check-in, a more productive use of your time might be to just focus on the spending that tends to get away from you so it'd be different for each person, but it tends to be things like going out to eat, shopping, clothes, tech gadgets, stuff like that. Figure out how much is reasonable to spend each month on a few discretionary categories and just track those. I think that's a lot more manageable.
Alison Southwick: You have a plan for where your money should go, but that can be tough to stick to. When maybe you're scrolling through Instagram and something pops up and you want to buy it and why not just do it? You're bored. What are some ways to think about spending that might help resist those urges to spend stuff that you don't need?
Robert Brokamp: This is tricky, especially with the holidays coming up. But here are a couple of suggestions. First, before you buy something, think about how long you had to work to earn that money and if you're paid by the hour, that's easy to do. For salaried folks, here's the rule of thumb. Divide your salary by 2,000. If you're paying $100,000 a year, that works out to be about $50 an hour. But that's before taxes. You have to lob off a third to get to the amount you can actually spend. Again, if your salary is $100,000 a year, you make $50 an hour pre-tax, but around $33 post-tax. Therefore, if you're in the store or you're on Instagram or whatever and you see something that costs $100 that caught your eye, it took you three hours of work to earn that money and is the purchase worth three hours of your labor.
That's one guideline. Another is to consider the opportunity cost. The more you spend, the less you have to invest for the future. Here are some numbers to keep in mind. Each dollar you spend represents about two dollars of future value in 10 years, five dollars in 20 years, and $10 in 30 years. You could spend $100 a day or have $200 in 10 years, 500 in 20 years, 1,000 in 30 years. That may not sound life-changing. You may think is it a big deal if my portfolio is smaller by a few hundred dollars way into the future? But if you ask this question every time you spend money for the next month, I bet you'll get an appreciation for how these purchases shortchange your future net worth by thousands and thousands of dollars.
Alison Southwick: One expense that we can't talk ourselves out of is housing because we all have to live somewhere. What's the rule of thumb on how much someone should spend on rent or a mortgage?
Robert Brokamp: I would say the upper limit that anyone should spend on housing is 30 percent of their budget. In fact, according to guidelines from the Department of Housing and Urban Development, a family that spends more than 30 percent of its gross income on rent is considered, "cost-burdened." According to the Census Bureau, around 50 percent of renters fall into this category. Now when it comes to buying a house, there are two classic guidelines. The first is known as the front-end ratio, and it says that your monthly housing expenses, including mortgage taxes, insurance, shouldn't be more than 28 percent of your monthly income.
Then the other is the back-end ratio, which adds other debt that you may have, school loans or credit cards or auto loans to your housing expenses and that shouldn't be more than 36 percent of your income. That's the most you should spend. If you can get below that, it's even better. Though that's pretty difficult in today's housing market, given high mortgage rates and high prices. Fortunately for potential buyers, prices have begun to come down a bit. I'll throw in one other guideline and this comes from David Buck in his book, The Automatic Millionaire Homeowner, "you should generally assume that the amount the bank or mortgage company is willing to loan you is more than you should borrow." I think that's actually a pretty good advice.
Alison Southwick: But one of the biggest expenses a family might make in their life is a college education. According to the college board, it costs more than 23,000 a year to attend an in-state public college and more than 53,000 a year to attend a private school. Multiply that by 4, sprinkle in some inflation and you're looking at a pretty big outlay of cash by the time the kid has earned a degree. Bro, what are the rules of thumb for covering the cost of college?
Robert Brokamp: The most common is the rule of thirds, and it goes like this: Save a third, pay for a third out of cash flow, and then borrow a third. Let's break those down. For saving, you first have to figure out how much college is going to cost. There are plenty of college savings calculators available on the internet. But as a family, you have to decide whether you're shooting for an in-state school or you want to save for a private education. Either way, I do agree with this guideline in that you don't have to have every penny saved by the time the kid is 18. Which brings us to the third that will come from cash flow. This could work because the average American reaches their peak earning years in their late 40s or early 50s, which is around the time the kid goes to college.
Plus, frankly, and I know this from personal experience, some of your household expenses will drop when the kid goes to school. You won't spend as much on food, utilities, sports, high school activities. Some of that money can be directed toward paying the college bill. Now, this brings us to the borrowing, the remaining third, and this one's much more debatable. Some families don't want to burden themselves or their kids with debt. While others think that's actually a good idea for the kid to have some skin in the game, so to speak. You're going to have to make the decision that's right for you and your family. But if the student is going to borrow money, here's another rule of thumb.
Limit the debt to roughly amount that the student expects to earn in her or his first year after graduating. That's going to be difficult for many kids who enter college, not knowing what they want to do after they graduate, which frankly is most of them. Nowadays, the average college grad earns $55,000 in the first year out of school. If the student doesn't have a clear career choice, I'd actually aim to borrow much less than that only if necessary. Finally, on this topic, I'm just going to point out that in July we interviewed former FDIC Chair Sheila Bair, about a new tool she helped develop that helps kids determine an appropriate amount to borrow for school. You can find that tool at studentdebtsmarter.org.
Alison Southwick: Let's move on to another aspect of personal finance that is important when you have a family, and that's life insurance. According to LIMRA, 50 percent of Americans have life insurance, which is down from 60 percent in 2016. According to the American Council of Life Insurers, the average policy is worth a bit under $200,000. Bro, is that enough?
Robert Brokamp: Well, I'm going to say probably not. The rule of thumb here is to get a term policy, not permanent, term policy worth 10 times your salary. Perhaps plus another 100,000-200,000 per kid to pay for college. Now, I will say there are plenty of online calculators that can help you determine a more customized figure. I've used many, but I actually think this guideline does a pretty good job. You might get some coverage through your employer and that's often like one-two times your salary. You might think, well, I may not need to buy as much on my own. However, given the fact that people often change jobs, I think it's best to just go with a 10 times rule and that you buy it for yourself.
Now, I'm a cheapskate, but here's a place where I think you really shouldn't skip. Getting another $100,000- $200,000 or more of extra coverage of term insurance really doesn't cost that much. But it could be a huge help to your family if they end up needing it. I always want to point out that nonworking spouse is should also be covered, especially if their main job is to take care of the kids at home. For this, you calculate the cost of hiring help to provide the services that the spouse is providing, and you multiply that number by the number of years needed. All that said, you only need life insurance if other people rely on your income or your services. If everyone would be fine financially if you passed away, you probably don't need life insurance.
Alison Southwick: You may not need life insurance, but everyone should be saving for retirement. Bro, how much should people be saving?
Robert Brokamp: The rule of thumb here used to be 10 percent, but nowadays, most studies indicate that 15 percent of the household income is better. That is to account for, like most experts, expect returns from most portfolios to be lower than they have been in the past. Plus, we're all living longer. Fifteen percent of household income, but that does include the employer match if you get one. These days the average match is between three percent and five percent. Let's say it's four percent where you work, that you need to contribute just 11 percent to hit that 15 percent target. However, this 15 percent guidelines for people who start saving in their 20s, maybe early 30s, and work until age 65 or 67. If you're getting a late start or you want to retire earlier then you likely need to save more.
Alison Southwick: Workers are going along in their careers growing their 401(k)s in IRAs. How much it somewhat have to feel reasonably sure that their retirement plan is on track?
Robert Brokamp: Well, fortunately, nowadays, many financial services firms provide savings benchmarks based on age and they're expressed as a multiple of household income. So what I've done here is taken the general average of benchmarks provided by Ally Bank, Bank of America, Fidelity, JPMorgan, and T Rowe Price. According to the average of what these folks say, someone who's 30 should have 0.8 times their household income save for retirement. If your household income is $100,000, you should have 80,000 saved already. That factor moves up to 2.5 income by age 40, five times income by age 50, eight times income by age 60. By the time you retire, you should have 11-12 times your income saved up. Now, these are super general guidelines and there are many factors that will determine the correct savings benchmark for your situation.
One is your income, and that is because Social Security is designed to replace more income for lower-income workers. For someone who earned, let's say on average $50,000 a year over their career, Social Security is going to replace around 45 percent of that. But for someone who averaged $150,000 a year over their career, Social Security is only going to replace around 25 percent of that. The more you earn, the more you have to save because Social Security replaces less of your pre-retirement income. This is reflected in the guidelines provided some of the firms I mentioned. For example, according to JPMorgan, someone with a lifetime earnings of $70,000 a year, they're only going to need 6.5 times at retirement because they're going to get a good deal of replacement from Social Security. But if your household income on average was $200,000 over the course of your career, then you did 12.3 times that before you can retire.
Alison Southwick: I know you have all this money saved for retirement, but how should you invest it? This is going to be our final rule of thumb today, and it's one that you actually think is outdated.
Robert Brokamp: Yeah. It's a rule that's been around for a long time, but it's basically this: You subtract your age from 100 and that's the amount you should have in stocks. It's also known as the own your age and bonds. So if you're 30, 30 percent of your portfolio should be in bonds. If you're 60, it should be 60 percent in bonds and so on. This is likely way too conservative. We, the Fool, have a general guideline that you just have about 10 percent of your portfolio in cash just to take advantage of opportunities. But it could be argued that investors with a high risk tolerance could keep 90 percent or more of their money in stocks well into their 40s, if not later.
Especially in light of the fact that people are retiring later and living longer. I should say that to compensate for these rising longevity, this rule has been updated. It first moved up to 110 minus your age to arrive at your stock allocation. More recently at subtract your age from 120 or 125. I could be much more on board with those latter two. Again, if you have the risk tolerance to handle the ups and downs of the stock market. However, even that guideline is imperfect because it presumes that as you age and retirement, you should lower your allocation to stocks. But research shows that it's actually better to maintain a static allocation to stocks at retirement, maybe 50-65 percent. With regular rebalancing, you're going to need a sizable allocation to stocks in order for your portfolio to last as long as you do.
Alison Southwick: Well, that's it for our financial shortcuts. Do you have a question about them or about personal finances in general? If so, you are in luck. On November 15, we're going to do a Mailbag episode. Send your questions to podcasts, plural @fool.com and we may answer it on the show.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.