POP QUIZ

The Dow Jones index (aka “the Dow”) is one of the most famous stock indexes, featuring 30 of the most prominent U.S. companies, but there’s something very unique to how this index is calculated…do you know what it is? (The answer is at the bottom of this newsletter!)

IN THE NEWS

💊 Walgreens Slashes Dividend, Stock Drops

There are a few ironclad rules in investing.

Don’t conflate stock price trends with real changes in companies’ operations, don’t trust companies that significantly manipulate their accounting, do the opposite of whatever Jim Cramer says, etc. Okay, the last one is a joke.

Another rule? Don’t cut your dividend, or more specifically, don’t pay dividends you can’t sustain into the future.

• When companies set the precedent of paying out cash to shareholders (dividends) rather than reinvesting in their own business, shareholders come to rely on that quarterly or annual income.
• What usually happens, then, particularly for mature companies, is that they cater to their shareholder base by paying routine, steady dividends. The only direction those dividends usually go in is flat or up, even if only modestly.

Walgreens is experiencing the fallout from when dividend payouts move in the other direction. After slashing its quarterly dividend almost in half on Thursday, the stock plunged 11%.

• Consumer staples stocks, like Walgreens, haven’t had a great year generally, either. The Vanguard Consumer Staples ETF (ticker: VDC) had a total return of just 2.37% in 2023.
• After the cut, Walgreens’ (formerly) juicy dividend yield — the expected annual cash return from buying the stock at current prices — dropped from 7% to 3.9%.

This is awkward: Income-focused investors flocked to Walgreens to collect one of the largest dividend payouts of any major publicly traded company, but it’s pivoting away from dishing out cash to shareholders to “strengthen (its) long-term balance sheet and cash position,” according to Walgreens’ CEO.

It’s the first dividend cut in almost five decades, and many existing shareholders aren’t happy about it.

Why it matters:

As Walgreen’s CEO argues, this move will provide “additional capital to invest in (our) core business in a way that stimulates growth again, because that ultimately is going to be the most shareholder-friendly thing we can do.”

In other words, Walgreens thinks (or hopes) it can put the cash that would’ve been paid out as dividends to work, generating greater returns down the road that exceed the benefit of receiving dividends today.

• Whether investors agree with that move will largely be influenced by their investment time horizon.
• The company is also reportedly on track to achieve $1 billion in cost savings in 2024 from closing unprofitable stores, layoffs, and using artificial intelligence to drive supply chain efficiencies, among other efforts.

Read more

💬 The Next Big e-Commerce Company is TikTok?

TikTok already flipped the social media world upside down, drawing YouTube, Instagram, and Twitter to all focus more on short video content.

Now, the company is taking on the e-commerce space, colliding with another giant: Amazon.

• TikTok’s parent company, ByteDance, hopes to grow its U.S. e-commerce biz tenfold this year, up to $17.5 billion.

What to know: TikTok effectively blends digital entertainment with impulse buying. Saw a video about a viral new make-up trend? Buy it on the spot through TikTok.

• The company says, “TikTok Shop is a completely personalized and fully integrated commerce solution, where sellers authentically connect with creators and communities to drive meaningful shopping experiences.”
• Have a company and products to sell? Use TikTok Shop’s affiliate program to partner with viral creators.

As the epicenter of viral content, it’s not surprising that brands are focused on TikTok, and TikTok wants to cut out the other middlemen, becoming a native marketplace for screen swipers.

• Of course, moving from app design and software to e-commerce is a considerable shift from its core competencies.

Why it matters:

It’s not just TikTok that sees an opportunity in the U.S. market for cheap goods — Temu and Shein, two other Chinese-owned companies, have strategically made inroads with young Americans, hoping to undercut Amazon’s dominance.

Worldwide, TikTok sold around $20 billion in gross merchandise, primarily in Southeast Asia. Thanks to TikTok’s surge in usage in recent years, Bytedance is valued at more than $200 billion, and likely much more if it can scale its e-commerce business in North and South America.

• Bytedance also hopes that its TikTok Shop will diversify the company’s revenue streams, which, despite surging 30% to over $110 billion in 2023, are largely from social media advertising.

Taking on the ‘Zon: TikTok intends to raise its fees for merchants from 6% of each sale to 8% in the coming months. Still, that’s much lower than the 15% seller fees typically charged by Amazon.

• As Bloomberg reports, “TikTok Shop lets users buy items while scrolling through a perpetual feed of short videos and live streams within its main social media app, hoping consumers use it as an alternative to Amazon.”
• That format reflects “an effort to combine the ease of shopping on Amazon with the product discovery afforded by apps like Meta’s Instagram.”
• More than 5 million new U.S. customers bought something through TikTok this past November as part of Black Friday and Cyber Monday deals.

Read more

☀️ Why the Future Is Bright If You Know Where to Look

Here comes some optimism to start the year, from artificial intelligence to illnesses to obesity and climate change.

In a recent column, The Wall Street Journal’s Greg Ip outlined why the future might not be so bad, and how technology could continue improving the world.

In recent years, we’ve witnessed wars, inflation, the pandemic, and climate change. But there are reasons to stay positive — not in the corny sense.

• Generative artificial intelligence will keep progressing in 2024 and could help countless everyday people on the job, at school, or home.
• AI drove 2023’s stock rally. Without the 40 AI-related stocks, the S&P 500 would have risen just 12%, not 24%. Many analysts have raised their long-run annual earnings growth estimates, too.

But as Ip writes, “Innovation’s true value, though, isn’t in raising gross domestic product or stock prices but in improving human welfare, and on that front, the progress goes beyond AI.”

Medical advancement: The FDA approved lecanemab, the first drug shown to slow Alzheimer’s. Medicare agreed to pay for it, and a similar drug could be approved next.

• They’re “a breakthrough for which neuroscientists have strived for decades,” noted one Alzheimer’s expert at the University of Nevada.

Ozempic and other obesity drugs are making strides, while the FDA approved cell-gene therapies for sickle-cell disease. These advances aren’t just positive now — they open opportunities for countless others to follow. In other words, progress tends to bring about more opportunities for progress.

Scientists believe children born today will live longer than any other children in history.

Why it matters:

The intersection between AI and drugs: AI is helping researchers combat diseases, sort through data, and discover new genes or proteins. One Stanford economist said AI could boost the U.S. economy for years, likely decades, and raise its long-term output growth rate.

Climate optimism: 2023 was one of the hottest years ever recorded, but big bets on renewable energy include wind, solar, batteries, hydrogen, geothermal, carbon capture and storage, plus small modular nuclear reactors, and fusion.

• Added another researcher: “We have been putting a lot of resources into trying to deal with the problem of climate change. That creates the opportunity to make a difference.”
• As the researchers stated, humans have progressed for thousands of years, not by stirring in pessimism but by remaining cautiously optimistic about what the future holds.

Read more on AI optimism

TRIVIA ANSWER

Unlike the S&P 500 and other stock indexes, the Dow Jones is “price-weighted” rather than “market-cap weighted.” Put differently, the S&P 500 is adjusted for the size of the companies it tracks — larger companies have more effect on the index’s value. But the Dow’s value is shaped by companies’ share prices, so companies with higher share prices (regardless of the company’s size) have more impact on the index. Read more here.