We are being framed

Here is today’s example of poor business journalism.
I actually wouldn’t even call it journalism.

The article was published on Business Insider Australia’s website and sadly (for them) The Australian 🇦🇺 Financial Review re-printed it.

Since the headline quotes an AUD $113 billion market cap decline, I’ll stick with using Australian Dollars 🦘in this post.

So, that makes Apple’s 🍏 AUD market cap A$2.92 trillion. That’s Trillion….

Incidentally, that figure is A$1 trillion more than Australia’s annual GDP. 😳

By the close of today’s trading session, Apple’s share price declined 2.65%, which is only A$77 billion. It’s much more dramatic when the author picks the lowest price of the day to quote within the article.

Although in the previous day’s trade, Apple’s stock price SOARED 6.35%.

This was an approx. A$ 185 billion increase in market capitalisation….

It is possible that Apple’s stock price may have risen in positive anticipation of a new range of phones being released?

But I can’t seem to find any news article about the previous day’s bonanza ‘anywhere’.

The author hasn’t lied or misled but my community service message is to understand or question how stories are being ‘framed” for your consumption.

October 14, 2020
by Rob Zdravevski
rob@karriasset.com.au

Apple’s market cap is larger than South Korea’s GDP

If Apple’s market cap (currently $2 trillion) doubles from here, it’ll be larger than the German economy. *
(and Amazon and Microsoft aren’t too far behind)

Today, Apple’s value is already larger than economies of Italy, Brazil, Canada, Russia, Spain or South Korea.

It’s already nearly double that of Australia’s GDP.

Many speak about “big tech” being overvalued and perhaps so, but a more pertinent reason to consider before buying shares in such behemoths at today’s prices is the LAW OF LARGE NUMBERS.

And a couple years ago, I thought Exxon Mobil was a Goliath at $350 billion market cap…..

Investors may find more interesting investment ideas in the Mid Cap market. FYI, the average market cap of a stock in the S&P 400 Mid Cap Index is about US$4.7 billion.

* Germany’s annual GDP is $3.7 trillion.

p.s. we know that GDP isn’t an equal measure to market capitalisation, but it made me raise an eyebrow.

#aapl#amzn#nasdaq#midcaps

September 29, 2020
by Rob Zdravevski
rob@karriasset.com.au

Abnormal Dividend Payments Aren’t Good

The dominant conversation that prospective clients are having with me is about their desire to earn a higher yield on their money.

I’m talking yield in terms of income.

A couple years ago they were earning 6% on their Australian Dollar cash held in the bank but now they are earning 2.7% and so the chase for yield begins, mainly via sub-standard, riskier assets in order to satisfy their single, blinding and qualifying criteria of income yield.

Surely, I must have written about that particular angle previously.

But the current trend amongst listed companies who are holding excess cash or re-generating pre-crisis levels of free cash flow – is to return cash to their shareholders.

We know that over the past couple years companies have “returned cash” by re-purchasing company shares. Appropriately, they have also re-financed debt at cheaper rates. This has also improved their “earnings per share” data which the stock market and analysts have loved.

Today’s trend is to return cash by increasing the company’s dividends at larger increments than in the past. Some companies are even making interim (or extraordinary) dividends in addition to their normal payment schedule.

Is this corporate board room’s new “increasing the share price” strategy? Raise your dividends abnormally, so those who are chasing yield will buy your shares and thus send your share price higher.

This also serves management handsomely, especially if they have share price performance linked remuneration (options, bonuses etc.), but I think this is also exhibits management’s laziness for their lack of ability to find ideas on how to use their company’s money to grow the business.

Company management would be quick to suggest that “this is in the best interest of shareholders”.

I don’t like this strategy, whether it’s from a corporate or an investing perspective.Historically, I have seen this occur before.

Today, the company appeases the market by handing out the cash and Tomorrow, it needs cash again; which is when they either issue new shares (which dilutes existing holders) or borrow money (often at interest rates higher than a couple years ago) which usually equates to a higher gearing ratio in their balance sheet.

One of our investing themes is to look for companies that are retaining their earnings. Our preference is to keep the money in the balance sheet and then deploy that capital to grow the business.

All this talk of corporate activists demanding cash being returned and balance sheets being lazy – blah, blah, blah.

I’d rather see the excess money left in the company’s bank accounts instead of leaving. If the board and management can’t develop a strategy on how to use that money appropriately, then they should be leaving, not the company’s money.

I think this is better for shareholders.

Spend 30% of your revenue on Advertising

Zillow and Trulia are competing to become the major force in the U.S. online real estate industry.

I think they are still in the early stages of large marketshare opportunity as Americans quickly catch up to (and are surpassing) how Australians have used the internet when searching for houses to buy or rent.

These internet based companies have recently announced plans to spend $65 million and $45 million on national advertising in 2014.

These advertising budgets equate to 32% of Zillow’s and 27% of Trulia’s 2013 revenue.

These are online businesses that dominate their industry space and yet they feel the need to increase their advertising budget in order to grow. I would also bet that advertising using “traditional” media will receive its fair share of revenue, in the manner which online dating agency and online gaming/betting advertise using television and print to get their message across.

Surely these figures are only for their advertising budgets and wouldn’t include the salaries of their in-house marketing staff.

Now 20% or 30% of your revenue being spent on advertising seems exceptionally high so I have listed some companies that continue to spend even though they already have large, visual and dominate brands.

Samsung spends $4.3 billion per year on advertising. This is equal to 3% of their current annual gross revenue.

Coca Cola spends $3 billion (6% of 2013 revenue)

Microsoft & Google part with $2.5 billion each (both accounting for 4% of revenue in each company)

McDonalds outlays $1 billion (also 4%)

and Apple’s advertising budget just hit $1 billion which represents 0.6% of their annual sales.

An article written by George Boykin from Demand Media expanded on this topic by writing;

“The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales (and your net margin is 10-12% after expenses), while some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and up to 20 percent if you’re in a competitive industry.

In 2010 the Chief Marketing Officers, or CMO, Council conducted a survey of its 6,000 chief marketing officer members to assess marketing and advertising spending across a wide range of industries. The survey results revealed that 58 percent of chief marketing officers spent less than 4 percent of gross revenue on marketing, 16 percent spent between 5 and 6 percent, 23 percent spent more than 6 percent, while 2 percent spent more than 20 percent. This survey seems to suggest that if you set your spending level between 0 percent and 6 percent of gross revenue, you will be in good company that includes 74 percent of the CMO Council membership.”

Source: http://smallbusiness.chron.com/percentage-gross-revenue-should-used-marketing-advertising-55928.html

Obviously, many businesses aren’t in the league of Coca Cola in terms of brand recognition nor marketshare or pricing power but it seems for ambitious companies seeking growth such as Zillow & Trulia, spending the suggested “mean” of 3% of their revenue on advertising and marketing will probably result in a mediocre payoff.

 I am wondering three things:

1) If the adage of “spend more and you’ll get more” holds true, then why do people attend seminars on “How To Advertise Successfully For No Money” ?

2) I don’t think many companies (large or small) even spend 3% of their revenue total on advertising yet they are quick to complain about the lack of sales.

3) How much thought does a company actually give to figuring out how to deliver their message in a competitive and crowded world, where others are also seeking attention.

Is placing an ad in your local newspaper, paying for Google Adwords, begging or buying for “Likes” on Facebook effective advertising?

Is this going to provide you with a Return On Investment?

If you answer “no” or “not sure”, then you are wasting your money and time.

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