Bank Stocks, Big Cable, & Brian Moynihan's Thoughts on the Economy

We start this week with an eye-opening chart from a recent New York Times article entitled “Warren Buffett is Buying Bank Stocks. Why Aren’t Others?” The article, while interesting, wasn’t what caught my attention. Buffett has been a big believer in financials for most of his investing career which has served him well so it’s no surprise he’s continuing to deploy capital into the money center banks.

What grabbed my attention was the total shareholder yield chart in the article. Most investors are familiar with dividend yields. For example, a $100 stock paying $3 per year in dividends has a dividend yield of 3%. For most of financial history, dividends were the dominant form of capital return so dividend yield was a good proxy for total shareholder yield. But as buybacks have become more popular over the last few decades, dividend yield is an increasingly inappropriate way to describe the overall capital return to shareholders.

Instead, investors should focus more on the total “shareholder yield” which combines buybacks and dividends into a single percentage yield. Look at how juicy the current shareholder yields are across the 11 sectors of the S&P 500! The average is almost 5.5% per year! The dividend yield on the S&P 500 is a touch under 2% currently. So just looking at the dividend yield when comparing stocks to bonds (or any other asset class) misses over half the total capital return taking place! With bond yields continuing to fall all around the world and the U.S. investment-grade corporate bond market only yielding a touch over 2% (with no long term growth prospects), a 5.5% shareholder yield (with presumed growth over time) looks pretty attractive.

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From there we move to a Wall Street Journal article entitled “You Got a ‘Free’ Internet Speed Upgrade. Then Your Bill Went Up.

We’ve discussed our high conviction investments in “Big Cable” companies like Charter Communications and Comcast in previous Beach Readings and this article continues that line of thinking. It also has a few excellent charts which we’ve included below regarding the booming business of delivering broadband internet to residential customers.

Since 2014, the number of residential broadband subscribers (“subs”) is up around 30% (to 66m households) while the average monthly broadband bill has grown about 27% to ~$66/month. That looks like strong pricing power to us. One could argue that we’re nowhere close to most consumers’ pricing pain threshold where they will cancel internet service or accept slower speeds for a lower bill.

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Getting customers to upgrade speed packages is high margin revenue for broadband providers. An expert in the article goes further, stating that “It’s 100% profit if you can upsell people to a higher speed tier.”

The “Big Cable” players like Charter and Comcast already offer the highest speeds available in the vast majority of markets they serve. Even though “entry-level” is typically 100MBPS, Charter and Comcast offer 1GBPS speeds (10x faster) in most parts of their networks. That may seem like more firepower than necessary, but they won’t stop there. In fact, those two broadband providers have already made the majority of the investment necessary to bring speeds up to 10GBPS in the near future. It looks like smooth sailing and higher broadband prices ahead.

We finish the week with a CNBC interview with Bank of America CEO Brian Moynihan.

Moynihan, just like J.P. Morgan’s Jamie Dimon, is the public face of a major U.S. bank. These money center bank CEO’s have tremendous insights into the economy merely by analyzing their own company’s results. It’s encouraging to hear Moynihan reiterating his view that the U.S. consumer and economy is stronger than most people think. Granted, no major bank CEO is going to do an interview and say the house is on fire. But the major banks have become almost utility-like lenders and movers of money, so their commentary on the health of the consumer should be taken seriously.