WWII 078: The Health of the U.S. Consumer, Monthly Dividends, Is a High P/E Ratio Good or Bad

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Main Topic: The Health of the U.S. Consumer

In this episode I discuss another major factor in the health of macroeconomics in our great country.

Here’s a fact for you: Consumer spending in the United States supports two thirds of our economy.

With unemployment reaching a new low of 4.3% recently, which is the lowest it has been in 16 years, and gas prices that are thirty percent less than their peak a few years ago, we would expect to see consumption rising here in the U.S. Instead, we are seeing the savings rate increase.

Have American consumers become frugal? Are we seeing a similar phenomena here in the U.S. that resulted in Japan having little economic growth for more than a decade?

Real personal spending growth is about 2.6% year over year and it should be closer to 4%. This lower spending growth is a large reason for the somewhat apathetic GDP growth we are experiencing.

This slow spending growth is contributing to the breakdown in retail sales and the slow same-store-sales growth we are having in that space.

Let’s take a closer look at the financial health of consumers and try to tease apart this mystery.

Total household debt in the first quarter of 2017 reached $12.73 trillion surpassing the $12.68 trillion peak of household debt that consumers owed just before the Great Recession hit. That indicator should give you pause. Pair that with the fact that credit card companies are starting to see rising charge-offs again and slowing loan growth and we have a scenario where a certain economic demographic here in the U.S. is struggling even with low unemployment. In a nutshell, poorer consumers are borrowing out of distress to fund purchases that are normally paid for out of income.

Student debt has grown from 5% of household debt in 2008 to 11% today. Is there a bubble in student loans and therefore in tuition? Maybe. I wonder if online learning will impact colleges in a similar way that Amazon has impacted retail.

However, household wealth has increased by 37% from the housing bubble peak.

How can both be true? How can you have rising loan charge-offs, and household wealth increasing so much?

There are a few explanations. One is that the lowest earning demographic sector here in the U.S. is struggling so much that they have had to take out debt to just continue living. During the 1950’s expansion, only 20% of the income growth went to the top 10% wealthy families. In this expansion, 80% of the income growth went to the top 10% of wealthy families, leaving little growth for the 90%ers.

This trend of the “haves” getting more and the “have-nots” getting much much less should be disturbing to you. Today, 76% of family wealth in our country is in the hands of the top 10% of families, and only 1% is in the hands of the bottom 50% of families. That dichotomy is increasing. We have a shrinking middle class in the U.S., and it is accelerating.

Another is that we have a new desire for frugality, less interest in conspicuous consumption after the burst of the housing bubble, and less confidence in Wall Street. Much of the disposable income realized by rising employment and falling gas prices was merely saved and not invested. Therefore there were huge swaths of demographics that did not participate in the stock market rise of the last ten years.

Yet another explanation borne by the facts is that our expenses are getting larger, especially healthcare, housing and as mentioned, education. Health care alone takes up 16.9% of our GDP versus 8.8% in other wealthy countries. Yet, did you know that the United States ranks 38th in life expectancy from birth? This outspend has not given us any advantages from a life span perspective.

These are all facts that support a general thesis of slow continued growth until the consumer decides to stop saving, and start spending. It would help if the wealthy would use their riches to spur the economy through increased investment and funding of the rising entrepreneur class we have here in the U.S. It would help if Congress would get of their asses and implement tax cuts and infrastructure spending.

Your guess is as good as mine if any of that actually happens in the near term.

Ask JB: Does my stock pay monthly or quarterly dividends and how much?

Taking Realty Income Corp (O) as an example, I read this stock pays a monthly dividend. If I was to purchase $10K worth of shares for a total of 176 shares, would this then pay out $2.53 per share, every month? That is $445.28 monthly which seems crazy. Is this true in this instance where this company pays out monthly? Or if the dividend was paid out quarterly..

Dividend & Yield 2.53 (4.48%)

JB SAYS: The dividend that is listed in most financial websites is the annual dividend. To determine what dividend you would get monthly, you would divide by 12. In the case of Realty Income, the monthly dividend is $2.43 / 12 or 0.2025 per share. If you bought 176 shares for $10,000, your monthly income would be $35.64.

In general, if you think something in the market seems crazy, it is. Your instinct was absolutely right.

ASK JB High p/e ratio, good or bad (self.investing_discussion)

submitted 18 days ago by baghdaddy1245

Is a high p/e ratio a good or bad sign? Examples: Netflix and Boston Scientific

JB Says: The high p/e ratio is not itself an indicator of whether a potential investment is either good or bad. No single indicator should be used to determine good or bad. It may indicate an expensive stock not worth the valuation OR a great company selling at a fair price where the underlying performance will be so good over time it doesn’t matter that you paid a “high” p/e multiple. My recommendation is always to do a business valuation of an idea using multiple valuation types: multiple of EBITDA, discounted cash flow, Graham number at a minimum. This will tell you if you have found a worthwhile candidate or a “momentum” stock that is just trendy.

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About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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