This Week in the Financials Sector: Earnings, Wage Growth, IRA Changes, and More
We're now a few weeks into earnings season, and some of our favorite financials stocks just reported their latest results. Plus, wages are growing faster than they have in years, and Americans can look forward to saving a little more for retirement in 2019.
In this week's episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss all of this news and more.
A full transcript follows the video.
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This video was recorded on Nov. 5, 2018.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Nov. 5. I'm your host, Jason Moser. Joining me in the studio, as always, is Certified Financial Planner Matt Frankel. Matt, did you have a good weekend?
Matt Frankel: I did. I went to a wedding in North Carolina, and there was no cell service, no internet, no nothing. It was in the middle of the mountains. It was really weird to unplug.
Moser: You were disconnected, as they say.
Frankel: As much as I ever have been.
Moser: That's a foreign feeling. I can't even remember the last time I was in such a position. I'll tell you, these days, I don't even understand how you go for an hour without checking your phone. It's a bad habit. I have to get out of it.
Frankel: You should try doing it for a weekend sometime.
Moser: [laughs] Well, on today's show, we're going to talk more earnings, of course. We're going to talk about some IRA changes that you need to be aware of, some interesting wages and salaries data. We'll tap into Twitter. We'll have One to Watch for you.
We're going to start the week with Uncle Warren, his latest investment in the payments space. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) earnings came out over the weekend as well. We have a lot to talk about with Berkshire Hathaway. Let's go ahead and get started first and foremost with Berkshire buying into fintech. Matt, this was something that I don't think a lot of us were expecting, but it's also not terribly surprising. He likes investing in those market opportunities. I think, more than anything, the most interesting part was the companies he decided to invest in.
Frankel: Just to be clear, first of all, this wasn't initiated by Warren Buffett himself. He doesn't understand these companies well enough by any stretch to make an investment in them. This was by Todd Combs, one of Buffett's two main stock pickers, and he's definitely the more techie of the two. Buffett gives him a stamp of approval, so we can consider it a Warren Buffett investment. The two companies are both foreign companies. There's Paytm, an Indian mobile payments company, and StoneCo, which is in Brazil.
At first glance, these might sound weird. Like, why would Berkshire be looking at some foreign fintech companies? But they do both have a bunch of Berkshire-like qualities. First and foremost, they are market leaders in their economies. They both have big market shares. They're both very well known in their local markets. They do have that going for them. It's like how Berkshire invests in Coca-Cola because it's the leading soft-drink provider. Same idea there, just on a more fintech-y and more rapidly growing scale. And StoneCo is the only public one out of the two. These are both relatively small investments for Berkshire -- $300 million a pop. That sounds pretty big, but it's not when you're talking about a $500 billion company.
I'm glad to see Berkshire finally putting more of its cash to work in outside-the-box ways. They've had a real issue building up cash. They still have more than $100 billion after spending some of their money on a bunch of new stock investments and things like that. I'm really excited that they're finding ways to put their money to work in ways that could actually end up moving the needle if these companies prove really successful.
Moser: Yeah. It's no secret we obviously love these payment companies all over the world. Plenty of opportunity out there. Even he noted it -- payments are a huge deal worldwide, is what he said. Berkshire already owns stakes in Visa, Mastercard (NYSE: MA), and American Express. It's neat to see them get some of these smaller firms in there that are a bit more based on technology, like you said. Definitely a little bit more difficult to understand. I think this is also a testament to the kind of team that he's building there at Berkshire Hathaway. I think investors need to feel really good about that.
I wanted to mention a little bit about the earnings that came out for Berkshire Hathaway this weekend. It was, generally speaking, a pretty good quarter. They saw a nice bump in operating income there. It did seem like the insurance underwriting profit saw a nice boost versus last year. There were some natural disasters last year that hit them on that line, of course. But another quarter of big share repurchases for Berkshire Hathaway as well, wasn't it?
Frankel: This was the first time they've been allowed to repurchase shares under the new plan that allows Warren Buffett and Charlie Munger to pretty much buy back shares whenever they both agree it's a good time. Berkshire bought back $928 million worth of shares this quarter. That sounds like a lot, but the takeaway here is not that this is a real needle-moving thing. Like I said, Berkshire is a $500 billion company. Buying back less than $1 billion worth of stock isn't anything to get that excited over. But the new buyback policy says that they can only buy it when Buffett and Munger both agree that the stock is trading at a substantial discount to its intrinsic value. The takeaway here is that Buffett really considers Berkshire cheap at the current levels.
Moser: Yep. And I think right now, it's about 1.4 times book, right?
Frankel: Yeah, which is actually pretty low for Berkshire. If you look at the history, Berkshire oscillates between 1 to 2 times book. So it's not that expensive in a historic context.
Moser: The former benchmark that they had given themselves was 1.2 times book, which seemed very reasonable. But by the same token, I don't have any problem with them lifting that benchmark and just saying, essentially, "We'll do it when we feel like it makes sense," because that's ultimately what they're doing. They've got a pretty good track record so far, so I think we can trust them. I do wonder how some shareholders may feel about that versus dividends. Certainly, dividends are something that they're going to hear more and more about as time goes on. I wonder if they're going to feel a little bit more pressure to cave into at some point. But I haven't really gotten any sense of anything like that in regard to dividends yet. Have you noticed anything? Do you have any feelings there?
Frankel: As the cash was starting to build up, Warren Buffett for the first time ever, I think, mentioned dividends as a real possibility. Then he walked it back over the next few quarters. His attitude is pretty much, "If you want a 3% dividend from the stock, just sell 3% of your shares every year." He said, "Trust me to do what I will with the profits. If you want income off Berkshire, just start gradually selling your stock that way."
Moser: That's a fair point.
Frankel: It's tough to argue with that. I mean, I'm a financial planner and I trust my money with Warren Buffett. I trust him to make the best decisions with Berkshire's income.
Moser: Well, if he's good enough for you, he's good enough for me, and he should be good enough for all of our listeners. That's the takeaway.
Let's talk about these IRA changes. I thought this was pretty neat. I was also a little bit taken back by the fact that this is the first increase to the annual contribution limit since 2013. You published a nice article here. We'll get that out to our listeners. Talk to us a little bit about the IRS increasing the limit on contributions for 2019.
Frankel: The IRS looks at contributions every year for things like IRAs, 401(k)s, and other types of retirement vehicles. For IRAs, it's a pretty big jump. This is almost a 10% jump, from $5,500 a year as the standard maximum contribution to $6,000. The reason being, they adjust this upward with inflation over time, but can only do it in $500 increments. So for a 401(k), where the maximum was $18,500, a $500 jump isn't that hard to come by when you're talking about inflation. But with an IRA, that's almost a 10% jump, and it takes a little bit of time before we get 10% inflation. Hopefully. If we're getting 10% inflation a year, we have other problems besides the IRA limit.
This is a big deal for retirement savers. It means that anyone who uses an IRA as their primary retirement savings vehicle has the potential to set aside an additional almost 10% a year for their retirement. Most people with IRAs, unlike 401(k)s, max out their contributions every year. I think the average is right around $5,000 as an annual contribution, and the maximum was $5,500. So it's fair to say that the majority of people with IRAs come close to at least maxing out their contribution. This is good news in the pending retirement crisis that you keep hearing about. The average American will be able to set aside a little more for their retirement if they choose to do so.
Moser: That's always good news. Of course, we encourage anyone and everyone out there to start saving for retirement. No matter your age. You can't start soon enough. We'll make sure to get that article tweeted out there on the Industry Focus Twitter feed for you, Matt.
We also saw some news here that wages and salaries this recent quarter jumped by 3.1%. The reason why this seemed noteworthy to me is it's the highest level in a decade. We talked a lot about, over the past several years, as unemployment has started recovering, that wages always seemed to be a little bit of a point of weakness there. While jobs were coming back around, wages weren't necessarily moving as much as some would want to see. It appears, though, now, that we have seen at least some kind of a jump there. What's your take on that? Is that something that's sustainable? Is that something that's going to play out in a good way on the economy? Or what?
Frankel: It's definitely sustainable. From an economic standpoint, you want to pay attention to what's called real wage growth. That is, are wages growing at least as fast as inflation? To put it in context, if your salary goes up by 2%, but it costs you 2% more to pay for your mortgage, pay for your rent, pay for your groceries, etc., you really aren't making any more money. But on the other hand, if wages are going up 3.1%, like we just learned, and inflation is rising at about 2%, then your purchasing power is rising over time. That's what we really want to see. That means everybody's collective standard of living is going up over time.
So yes, wage growth is excellent. Highest number in 10 years. But pay attention to inflation, especially as we go on this rate-tightening cycle and the Fed's monitoring the economy like they are right now to see what the next move is.
Moser: Yeah. That inflation lesson is a really good one. We've talked about it in some of our Fool School classes. We'll meet with Girl Scout troops or classes, kids around 10-12 years old, give them some ideas as to how inflation works. We talk about it from the perspective of having your money in a piggy bank versus having it in a bank account versus having it in an investment account. You can see over time, obviously, your money's going to be very safe sitting there in the piggy bank, but over long periods of time, that inflation takes hold and actually erodes the value of that money in the piggy bank. The piggy bank is safe, but it's actually hurting you, because you're not keeping up with inflation. That was the lesson that got a lot of their attention. Once you can start understanding how that works and how it works over long periods of time, I think it really helps justify the case for not only investing, but investing the way we do here, taking that longer time approach.
Matt, let's dive into earnings-palooza. It just keeps on coming, man. I tell you, we've got more companies reporting this week. We had a lot of companies that reported last week. Let's go ahead and kick it off here talking about Mastercard. Tell me what you saw for their most recent quarter.
Frankel: It was good. The stock popped right after the earnings, so you know everybody liked what they saw. Earnings were up by 33% year over year. Revenue grew by 15%. Anyone who thinks companies like Visa and Mastercard are maxed out, this proved them wrong once again.
Moser: [laughs] Maxed out. I like that. You probably didn't even mean to do that!
Frankel: [laughs] No pun intended! The things that really were encouraging to me were, one, cross-border transactions, meaning the international revenues, were up by 17%. That was the strongest of their main areas of growth. That was very encouraging. And not only that, but their margins are getting better. Their expenses only went up 11% while their revenues went up by 15%. As we've said many times, anytime your revenue is growing faster than your expenses is a very good thing. Mastercard's margins were higher by over 2%.
The other really big thing that stood out to me was the aggressive buyback that they're using. I know everyone's buying back stock right now. It's kind of the buzzword of the day, given the tax reform savings. But Mastercard not only bought back $1.2 billion worth of stock in the third quarter alone, they came out with their earnings report and said, "We took advantage of this big market correction in October." In the first 25 days of October, they bought almost $360 million more on top of that $1.2 billion. It's really nice to see them being proactive and saying, "We took advantage. We thought our stock was dirt cheap in the beginning of October, so we bought a lot more."
Moser: As a Mastercard shareholder, I like everything you just said there. Let's keep it going in that direction.
Let's take a look here at Fiserv (NASDAQ: FISV). This is an interesting business. I think it flies under the radar for a lot of people, but it's a really good business. It's the company that provides the software for a lot of these smaller financial institutions, smaller banks and whatnot. They provide the software for these banks to get their work done -- the ledgers, the payments, and whatnot. Again, it's a good business. The stock is having a decent year so far. It's pulled back a little bit here, but obviously is benefiting from the growth in electronic payments. Generally speaking, from a business perspective, they benefit from switching costs. Banks don't typically like to switch operating systems very often. It's a pretty big undertaking. So what this means is, Fiserv is a partner that grows with these banks and continues to offer more services.
What this ultimately does is give Fiserv a little bit of pricing power as time goes on. We'll see them exercise that here and there. But generally speaking, you're looking at a business that's going to continue to grow around 4%-5% organic growth. They really do a good job of bringing it down to the bottom line. When you talk about the share repurchases, if we look at their share count going back to 2013 to today, they have brought that share count down 22% in that period of time. They continue to do a really good job in buying back shares and helping realize value for shareholders. It's not something that's going to sit there and double overnight, but I think it's going to be a nice, slow grower for folks looking for some financial exposure there.
Let's talk about Paycom (NYSE: PAYC). Matt, you went through their quarter. What did you find?
Frankel: More good things. Revenue and earnings were up by 32% and 33%, respectively. The reason I love Paycom, they just announced that recurring revenue now makes up 98% of their total. If you're not familiar, Paycom is the payroll processing software company. Ninety-eight percent recurring revenue is a pretty nice moat.
This is a service that companies need. Businesses need to process payroll. This is a great recurring revenue stream. It's growing, like I said, at a 33% year-over-year clip right now. They're not buying back shares very aggressively. They said they bought back about 30,000 shares, which is a drop in the bucket. They're plowing all their money back into growth, which is exactly what they should be doing. If you can have 98% of your revenue be recurring, and grow that at the same rate for another few years, they're going to be in really good shape.
Moser: Yeah, recurring revenue is a beautiful thing. We'll wrap it up really quick with Markel (NYSE: MKL), another one of our Foolish favorites here. We've talked about this business for many, many years. It's our baby Berkshire, as we like to call it. Another very good quarter for the company. We talked about the three main drivers of the business in the insurance underwriting. They stood at $4.5 billion in insurance underwriting this quarter, $4.5 billion for the first nine months of the year, versus $4.1 billion a year ago. We also talk about their investment income, which was up to $320 million from $304 million a year ago. And then there's the Markel Ventures side of the business. That's their investments in these smaller businesses. They take meaningful stakes in these businesses. I think they have somewhere in the neighborhood of 17 or 18 and the portfolio now. They brought in $1.4 billion in revenue on the Markel Venture side, versus $933 million a year ago, for the first nine months of the year. So, seeing some very good performance there on the Markel Venture side of the business as well.
They just keep on doing a lot of the same things here, running a smart business. Co-CEO there, Tom Gayner, he's a leader we like. We've had a chance to speak with him a number of times. So as a Markel shareholder myself, I'm happy to see that they're doing what they're doing. And I think shareholders should remain very encouraged about where this business is headed.
Let's tap into Twitter this week. We had some questions that we wanted to get to here. And so first one here is coming from @maurerpowerin. Matt asks, "Why, in the light of the Equifax (NYSE: EFX) breach, would it be a good idea for everyone to have their banking information shared? It sounds like the UltraFICO only benefits a small number of people, yet everyone will have their data shared, potentially, without consent or consequence." Matt, you wanted to clarify a few things in regard to this question, right?
Frankel: Yes. It's a good question. When I spoke with the FICO people at the Money20/20 conference a couple of weeks ago, they really clarified this. That was one of my first questions that I asked them. I don't want everybody having my bank account information on top of my credit cards and things like that. There are two points I wanted to clarify there.
One, your banking information will not be added to your credit report. This is not going to be part of your three-bureau credit report that people can access, you can access, that Equifax, Experian and TransUnion maintain. Your bank information will not become a component of your credit report. Two, you have to opt in to individual lenders for the UltraFICO program. In other words, if I'm applying at a certain lender, and my credit score is a little too low for the loan or whatever other product I want, I can say, "Here's my bank account information. Run my UltraFICO score." It's an opt-in with an individual lender. It's not that everybody is going to have your bank information.
So it's a little more legwork on the process of the consumer, because your information isn't just out there for anybody to access through your credit report. But it is kind of nice in the interest of data security, as you mentioned, to have the ability to give your bank account information or not give it to any lender you're applying to.
Moser: That's key. Control is the key there. It seems like the consumer at least will have that option. That's important.
That leads to this next tweet I want to read off from @TSprings11. This is Troy. He was actually an intern with us here at the Fool. Troy says: "I love the UltraFICO concept. I wasn't able to get a credit card until I became a USAA member. They just verify military, not credit score. Meanwhile, I had a job since 14, am a college graduate with no student debt, in good financial shape." I wanted to read that off because I think that really is important here. That's where the UltraFICO could have a great impact, helping people who just don't have established credit yet. If it's something where you can bring in actual, real behavior, based on savings and checking, that's a great alternative. It's a great option to have. I think Troy made a very good point there. It sounds like someone like him would benefit from that. Thanks, Troy!
Finally, from @BTCapital12, asks: "Can you guys comment on the lawsuit filed by Walmart (NYSE: WMT) against Synchrony (NYSE: SYF)? Do you think it's really just part of a bargaining strategy for the receivables? Or is there more to this? Also, do you then think Capital One (NYSE: COF) is getting the short end of the stick as they won the Walmart deal?" Folks, remember, you can always reach out to us via Twitter. These are some great questions here. What do you have there for BTCapital here, Matt?
Frankel: It's kind of a he-said, she-said at this point. Walmart is claiming that Synchrony didn't use great underwriting standards when approving people for their co-branded card, and it resulted in higher-than-expected losses, and therefore lower income, for Walmart than they were promised with the deal. They're suing for $800 million to recoup whatever they feel they lost. Synchrony's claim is that this is a baseless lawsuit, they used the same underwriting standards that they use for all of their store credit card products, and that Walmart is just trying to get out of paying market value for that loan portfolio, which they agreed to do if they broke the deal.
The outcome of this remains to be seen. I tend to think that Synchrony will be the winner. I don't think Walmart's going to get $800 million out of them. They may end up settling at some point. Synchrony's business goes beyond the Walmart partnership. I think at their growth rate, they'll make up the lost revenue, and they're not terribly worried about the Walmart revenue. They just want to put it behind them at this point, and the lawsuit is preventing them from doing that.
Moser: Sounds good. I appreciate that, Matt, and I'm sure our listeners do, too.
Let's wrap up the week here, as we always do, with One to Watch. What's your One to Watch this week, Matt?
Frankel: [laughs] My One to Watch is Synchrony, SYF, actually. Not only is it down about 10% after the lawsuit was announced, but, as I mentioned before, I love their high-yield business model. It's a very efficient company. I had a chance to meet with their management team. I think they have great leadership. There are a couple of really promising avenues they're taking their business. The CareCredit healthcare product has a lot of runway as more healthcare costs are being shifted to the consumer. They're starting to bundle a lot of their store card products together. All of their different home goods retailers, they're going to offer one credit card product that can be used across all of them. Same with auto parts. There's a lot of runway for growth here. As they're bringing in more and more retail deposits. Their cost of capital is getting lower. I think it's a great time to get into this at a big discount. And hopefully, I'll be able to shut up about Synchrony for a few days so I can buy some.
Moser: [laughs] Yeah, we have trading guidelines we have to adhere to here. If we talk about it, we can't buy it, and if we buy it, we have to shut up about it for a while. What's the ticker there for Synchrony, Matt?
Frankel: It's SYF. If I don't mention Synchrony next week, that might be why.
Moser: That's always a good thing to remember. I was trying to figure out, did I want to get Berkshire Hathaway as my One to Watch or Markel? I really love what both their quarters looked like. I'm going to go ahead with Markel, MKL. I'm really enthusiastic about where this company is headed. It's still a fairly small insurer, but they're building this business in that Berkshire Hathaway model. It's exciting from a number of different perspectives. I love the Markel Ventures side of the business. Again, I think Tom Gayner is doing a lot of great things with these guys. I think Markel should be on probably everybody's radar here at this point.
And, listen, folks, another thing you need to have on your radar, why not go check out The Motley Fool's newly renovated YouTube channel? You'll find clips from all of our podcasts in our entire Foolish family. Just go to youtube.com/themotleyfool and check it out. Dylan and his team have done a phenomenal job of putting together some really great content there. You get stuff from all the podcasts and more. It's an excellent experience there.
Matt, thanks again for joining us this week! This was a great show, as always! I appreciate it!
Frankel: Always! I love being here!
Moser: Folks, 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. This week, the show is produced by Ann Henry. Ann, happy belated birthday! That's just great! Thirty has nothing on you, I promise. For Matt Frankel, I'm Jason Moser. Thanks for listening. We'll see you next week.
Jason Moser owns shares of Markel, Mastercard, Twitter, and Visa. Matthew Frankel, CFP owns shares of American Express, Berkshire Hathaway (B shares), and Markel. The Motley Fool owns shares of and recommends Markel, Mastercard, Paycom Software, and Twitter. The Motley Fool owns shares of Visa. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
