Retailers’ Share Buybacks Boost EPS

Stock Buybacks, Not Consumer Spending, Drive Earnings for Some Retailers

Supply-chain issues, rising inflation, and higher labor costs have not hurt retailers’ ability to post strong earnings per share this year. But some companies have stock buybacks, not consumers, to thank for their earnings growth.

Over the last decade, a laundry list of retailers including Dillard’s (DDS), Kohl’s (KSS), Home Depot (HD), and Gap (GPS) bought back shares, reducing their shares outstanding. Doing this can make a company’s earnings appear stronger. For example, sales at Kohl’s have been about the same as they were in 2016, but earnings have grown because of stock buybacks. The same goes for Dillard’s: the company’s earnings have been surging even though revenue is the same as it was in 2018. Cost-cutting is one contributing factor, but stock buybacks have also played a big role.

Share Repurchases Are Back

Retailers put share repurchase programs on hold during the pandemic, but have recently started to buy shares again. Kohl’s resumed its share buyback program in the first quarter of this year. From 2010 through the early part of 2020, Kohl’s bought shares every quarter. Meanwhile, TJX (TJX), bought back $300 million in shares during the second quarter.

Investors seem to be applauding these stock buybacks, sending retailers’ stocks soaring this year. However, critics argue that retailers would be better off spending money on improving their online business and bulking up their supply chains.

Concerns Linger Over Rising Prices

In addition to stock buybacks, retailers have rising prices to thank for their growing earnings. With the cost for materials, freight, and labor rising, retailers have been passing along the extra expenses to consumers. These price hikes are more than offsetting the increased expenses. So far, consumers seem to be taking the price increases in stride. Retail sales in October gained 1.7%, surpassing economists’ expectations.

Still, it is not clear how long high inflation will last and how long consumers will be willing to pay higher prices. If consumers pull back spending, this could be a blow for earnings that even stock buybacks can’t fix.

How Many Credit Cards Should You Have?

In general, there is no “right” number of credit cards. But credit mix, meaning the types of account that make up your credit report, determines 10% of your credit score.

That means having numerous accounts in good standing — like credit cards, a mortgage, and other loans — may have a positive impact on your credit score.

But keep in mind that more accounts are only a good thing if you’re maintaining on-time payments and a good debt-to-credit line ratio.

Track your credit score for free in the SoFi app, where the factors affecting your score are broken out to make them easier to understand.

The US Dollar

US Dollar Making a Holler

The U.S. Dollar (USD) spot index recently hit its highest level since July 2020 after a swift run-up between the beginning of September and mid-November. Still well off its highs of 2020, the recent move up is notable after the currency seemed to be stuck at a lower level for the first half of the year. Here’s my take on what’s driving it, how it affects other assets, and what’s next in the dollar move.

In the Driver’s Seat

Stop me if you’ve heard this before...inflation is high. One of the main factors that drives movements in the USD is inflation — in this case, consistently elevated inflation readings that lead market participants to believe the Federal Reserve will have to raise rates sooner rather than later. When rates rise, it stimulates foreign investment because the rate offered here is higher than those offered abroad, and in turn, the currency appreciates.

One way to look at forward expectations of inflation is the differential between Treasury Inflation Protected Securities and nominal Treasuries (the inflation rate that would make an investor indifferent between the two is the breakeven inflation rate). The higher the breakeven rate, the higher investors expect inflation to be over that period.

Since the end of September, the two-year breakeven inflation rate has increased from 2.5% to 3.5%. That rate was below 2.0% at the end of 2020. Big move in inflation expectations = big move in the USD.

What’s In It For Me?

This is the investor’s conundrum. Simply stated, there are two main environments in which the USD increases: 1) when the U.S. economy is doing better than other economies, 2) when people are afraid and piling into safe-haven assets.

I would argue we’re more in the first camp than the second, but there are elements of both present. So what does that mean for other asset types?

Some main effects a stronger USD has on other assets:

•   Commodities denominated in USD become more expensive and could see a decrease in demand

•   Companies with higher international revenue exposure get hit with foreign exchange costs (40% of S&P 500 companies’ revenue comes from abroad)

•   Emerging Market economies that issue debt denominated in USD face higher interest costs

All of these things could happen if the USD strengthens further or stays relatively strong vs. other major currencies. But the main question is, will this run-up last?

The Holler Fades

As long as inflation expectations run hot and we are antsy about rate hikes, the USD is likely to see periods of strength. Over time though, I think this strength fades for three reasons. First, because goods inflation will eventually relax from these high levels as supply chain issues are resolved (although I still believe overall inflation stays higher than pre-pandemic levels, but that’s a column for another week). Second, because the twin deficit issue in the U.S. (current account deficit and budget deficit) keeps a lid on its potential. And third, because we have a new option to consider in times of high inflation and monetary policy changes: crypto. Together, I see those factors as limiting demand for the USD and coming back into view in the first half of 2022.

Volkswagen Is Coming for Tesla in the EV Charging Space

Volkswagen Bets on EV Charging Stations

Volkswagen (VWAPY) is hoping to give Tesla (TSLA) a run for its money in the EV charging station market. Volkswagen is going on a hiring spree, rolling out new technology to support EVs, and inking partnerships in the EV charging market.

The company is aiming to build out an infrastructure of charging stations that will rival Tesla’s. Volkwagen is betting that if the number of charging stations can support the electric vehicles it is aiming to sell, customers will feel more comfortable buying EVs because they won’t be worried about a lack of charging infrastructure.

Volkswagen Boosts EV Staff

Volkswagen currently has about 150 employees in its charging and energy division and is aiming to double that by next year. The vehicle manufacturer is ahead of some rivals when it comes to investments in EVs and batteries, committing to spend about $39 billion on EV batteries through 2025.

Still, Volkswagen believes that if EVs are going to become mainstream, charging infrastructure needs to be dramatically ramped up. Tesla already has a global network of around 30,000 fast chargers which can give a vehicle a 125-mile charge in 15 minutes. Volkswagen expects to have a network of about 45,000 fast-charging stations by 2025 spread out across Europe, China, and North America.

Volkswagen’s Strategy

While Volkswagen and Tesla are both trying to control the EV market by churning out cars, building charging networks, and selling power, Volkswagen is taking a slightly different approach from Tesla. Volkswagen plans to make its charging stations available to all EVs, not just Volkswagen vehicles. In contrast, almost all of Tesla’s charging stations only work with Tesla vehicles.

The electric vehicle market is heating up as more vehicle manufacturers strive to go green. Volkwagen is hoping that its investments in EVs, charging stations, and power will pay off.