In this episode of Market Foolery, Mac Greer and Motley Fool contributor Dan Kline talk about dividends and how drones are aiding physical distancing. Next, they discuss video streaming businesses, suggest some shows to watch, and much more.
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This video was recorded on April 27, 2020.
Mac Greer: It's Monday, April 27. Welcome to Market Foolery. I'm Mac Greer, and joining me from Florida is Motley Fool contributor Dan Kline. Dan, happy Monday!
Dan Kline: [laughs] I'll believe you if you say it's Monday.
Greer: [laughs] They all do blur together, as we have discussed before. It's day; I know it's day and I think it's not weekend. That's how I measure the days now: not weekend, day, night; three categories.
So Dan, let's talk some GM (NYSE: GM), let's talk some dividends, let's talk some drones. And as we wrap things up, let's talk about something that you just wrote about, Disney+ (NYSE: DIS), and whether or not it can save Disney stock. But let's begin with the market.
Now, at the time of our taping here, mid-day, Monday, all the major indices up slightly. And this, as part of a month, Dan, this has just been an incredible month for the Dow, for S&P, the Nasdaq, all up big, having their best month in years. So I want to start there. As an investor, how are you thinking about this market? Because we have the market, you know, just chugging along this month, and at the same time we have most states still under stay-at-home orders.
Kline: So I don't think about the market in the short term, and right now, it's so emotional. So if there's a tiny little hint, if like, a village in Alabama says it's going to reopen a gym, the market bounces up and has a good day. Which, I like that, that there is, sort of, an appetite for optimism, because we've been through such a miserable time. That said, I'd be looking at companies that are going to do well during this and after, or companies that you really liked beforehand that you believe will bounce back when this is over.
So I'm not looking to, sort of, ride out these trends or see what's going on or figure out where the bottom is. I think we've got some reckoning left to come, but that's just a guess.
Greer: Okay. So let's talk about some of those companies. GM, General Motors, announcing it's suspending its dividend and stock buybacks. Now, shares of GM are down around 40% for the year. Dan, GM has stopped producing cars, it has not yet announced a time frame for when it will resume production. GM is producing ventilators and personal protective equipment. What do you make of the GM news that it will suspend its dividend and stock buybacks?
Kline: Yeah, I think it's pretty smart to preserve your cash when you're not selling any product. [laughs] And I understand, I got some blowback on the live shows from people saying, "oh, but, you know, I count on those dividends," and I get it. But you can't count on a dividend if a company goes bankrupt. So I would rather GM stays in business longer, puts itself in a situation where it has more cash and a longer runway, because eventually, Americans will need cars. This will end, and people who are putting off a purchase will buy. Prices are really good. So if you need a car, it's actually a pretty good time to buy a car. But I am in favor of being as cautious as you can be right now for your company.
Greer: Okay. So along those lines, I want to ask you about Disney, because Disney has taken some heat for not suspending its dividend. What do you think?
Kline: Yeah, I think it's a mistake. And look, Disney is in a good position in terms of their available cash, but they've also borrowed quite a bit of money. I mean, they borrowed the money for the Fox purchase. So to be paying out cash when you're not operating, you know, it seems like an artificial way to prop up your stock price, and I'm just not concerned about Disney stock price in the short term. I'm guessing executives are, who often have bonuses tied to stock price.
Greer: Okay. Well, we're going to talk more Disney in a bit, but first, I want to talk about a new development in the world of social distancing. UPS (NYSE: UPS) on Monday announcing that CVS and UPS will start using drones -- yes, drones -- next week to deliver prescription medication to The Villages retirement community in Florida. Now, Dan, you are in Florida, The Villages is the biggest retirement community in the country. Now, the drones will drop off prescriptions to a location near the community, and a truck will finish the delivery. So this isn't door-to-door, but this is going from CVS to somewhere near where people live.
Kline: Yeah. I mean, they've been testing this, and I think it's actually in Virginia, in some rural town, with the idea that you could bring prescriptions right to the door. And you're going to see combinations of this and robo-trucks and other things delivering. But The Villages is a unique place, these are generally stand-alone homes or row houses, and it's an entire community, over 100,000 people, that are all at least +55, generally a lot older. So there's a lot of reasons to minimize contact for these people. But I'm not entirely sure how a drone, to a truck, to the door minimizes contact. That seems to me the same amount of contact of driving the truck to the community and bringing it to the door.
It's a little strange for me. But that said, I think you're going to see niche use of drones doing things like this. A drone isn't going to, like, bring you a burrito and put it in your hand, but it might leave your CVS box at your door or on your balcony or some other location if you live someplace that isn't a densely packed city.
Greer: Okay. So when you look over the next 5 to 10 years, and as someone who studies the retail landscape, when you look at the role of drones, are you bullish, are you bearish? I know you say they're not going to be delivering burritos, but what's the role going forward?
Kline: It's going to be niche; it's going to be fill-in; it's going to be a supplement. In rural places, where it doesn't make sense to send a truck, it might make sense, and it's obviously safer to send drones. But I don't think New York City or Alexandria, Virginia, wants a sky filled with drones. That seems like a recipe for disaster.
So they will be used, they will have a place, but drones are much more likely to be used, and are being used, by say, Walmart in a warehouse to take inventory. That is a much safer -- it's not going to hit, you know, a random person walking by. There's going to be a lot of commercial uses for drones, but it isn't going to be to replace the pizza guy.
Greer: Okay. And no beer and wine?
Kline: You know, maybe some beer and wine. But probably, I don't want a drone delivering a wine bottle. Have you ever had to get wine out of your stairs? It's not fun.
Greer: No, that just seems fraught with issues. I mean, I don't think you can do that. But, dare to dream, dare to dream. And, Dan, let's talk Disney. We talked Disney a little earlier, but I want to talk about a few different developments here, including something you just wrote about.
But first, Disney today announcing big plans for May 4. Now, May 4, they will begin streaming Star Wars: The Rise of Skywalker, that'll be two months earlier than they planned. And then Disney also announcing that the final episode of The Clone Wars and the first episode of The Mandalorian documentary will be available on May 4. So with all that in mind, you just wrote a piece this weekend, Dan, entitled "Can Disney+ Save Disney Stock?" So can it?
Kline: Yeah. And that's a very melodramatic headline. [laughs] I will point out that the goal of headlines is to get readership, because I actually believe Disney will be fine. Its other businesses will be OK. But what I want to really point out is, people are underplaying just how big Disney+ can be. When they last reported, they went from 10 million to 50 million subscribers. That wasn't even based on coronavirus growth, that was based on adding a few new countries; they're in, like, eight or nine countries. Netflix is in, like, 180, somewhere in that ballpark.
Disney+ is probably at 75 million now. It wouldn't shock me if in a year, they are at 125 million, 150 million, and their cost structure is dramatically lower than Netflix. Netflix has to produce, like, 200 series a quarter and throw them at a wall. They have to pay huge money to comedians. Disney can pick and choose a few series based on its named intellectual property. You're going to watch the new show starring one of the Avengers, you're going to watch a new Star Wars show, you're going to watch when Rise of Skywalker is released. They don't have to spend the money Netflix does. This thing is going to be a cash cow very quickly.
Greer: Okay. So I want to ask you more about that, and specifically, the Netflix piece of that. When you talk about their cost structure, how long can Netflix play that game?
Kline: They're going to have to play that game -- you know, it lessens, as they get into every market and they've localized content, they don't have the expense of having to, you know, record dialogue in new languages, they'll have some hit shows in each market. Eventually, they're in a position where they can maybe cut their content spend in half, but their content spend is $6 billion to $8 billion a year. Whereas Disney, pretty much everything Disney puts out on Disney+, that's original to the service, is going to be a guaranteed hit. You know, when you're launching a show in the Star Wars universe, it is not a big surprise that Star Wars fans watch it. So Disney is really in a position where they can keep costs under control. They're also in a position where they can raise the price pretty easily. They're at $6.99/month; that's a great introductory price, but do you really think families are going to drop it if it goes to $9.99 over the course of the next three years?
Netflix, too, I think, can go up to about $19.99, and that will help some of their deficit. But these are the two winners in the space. And for Disney, this is going to be its biggest segment, maybe as soon as, well, this year it'll probably be its biggest segment because others are closed. But in a normal year, this will be Disney's biggest segment, if not, in 2021, possibly, almost certainly, by 2022.
Greer: And, Dan, Netflix is still growing like a weed. For the last quarter, they added almost 16 million subscribers, so 183 million subscribers now for Netflix. When you look, and as we're talking here, we're talking about Disney and Netflix. Do you think there's room for both Disney+ and Netflix to succeed over the next 5 to 10 years? Or if this were wrestling, is this essentially a cage match where only one of them comes out alive?
Kline: No, these two already won. It's a case of whether there's a market for HBO Max and Peacock and all the other services out there. Those are going to be harder sales, but remember, as people cut the cord, and there are still 80 million-something Americans who pay for cable, that's $100 to $200 that comes available to you. Some of those people already have Netflix and Disney+, so they'll probably dabble and add one or two secondary services. But I think, right now, this is a battle for the bronze medal. If somebody can establish themselves in third place, that's a strong position to be in. And I'm some, sort of, not counting Hulu, which is a Disney-owned property, because Hulu is going to get bundled by a lot of people with Disney+, and it's probably going to do reasonably well and be a driver for Disney. There's not a ton of original content being produced on Hulu, so it's not that big a spend. But yeah, Disney and Netflix have already lapped everybody.
Greer: What about Amazon (NASDAQ: AMZN)? Should we include them in the Disney and Netflix discussion?
Kline: How many shows do you watch on Amazon?
Greer: You know, I think we watch a fair amount on Amazon Prime, I think.
Kline: Really? See, I forget it exists. Amazon is the eBay of streaming services, you know: You forget they exist. And a lot of stuff that's really hyped, when you actually dig into the research and find out how many people are watching it, it's like, 300,000 people. And they have some shows I've been interested in. I hear good things about The Boys; I think that's what it's called. And generally, I've tried a few things on Amazon and nothing has struck; you're not paying for it. I don't precisely see where it's a particularly big value-add. Would you cancel Prime if they got rid of the TV service?
Greer: Yeah, no, I'm not canceling Prime.
Kline: Yeah. It makes no sense to cancel Prime, because right now, I don't know, I'm getting deliveries from Amazon, like, four times a day. [laughs] Like, I think of something, I go in and put an Amazon order, and now you have this fun Amazon roulette of when will it show up, as opposed to, previously, when it would come the next day. So I just don't think it's a relevant service. I don't precisely understand why they pay for it, frankly.
Greer: Okay. So I'm going to count you as skeptical. Do you have a Netflix or Disney+ recommendation for me?
Kline: Well, if you haven't watched The Mandalorian, you should absolutely watch The Mandalorian.
Greer: So great.
Kline: Also, on Netflix, this is a bit of a sleeper, but I really like GLOW. It is based on the 80s women's wrestling group. Very, very campy, the original. The show actually, like, a little dark, and it's just really well done. It's one of those things where you could say, like, well, I'm not a pro wrestling fan. It's not really about wrestling, it's about the relationships between the people. And my wife didn't like it, so that's -- I would say women would like it, but in case of my wife, that wasn't true. And my wife really, really, really likes Ozark and I have not been able to make myself watch it yet.
Greer: Okay, good. Ozark and GLOW. There you go. Okay. For our desert island poll, as we wrap up here, over the next five years, you're on a desert island and you have to, you have to buy one of these stocks and hold it. So let's go: GM, Disney, Netflix, let's throw in CVS and UPS.
Kline: Disney without a shadow of a doubt. CVS would be attractive, if they didn't just buy a health insurance company, [laughs] which absolutely is something that makes me a little bit nervous. But Disney has the No. 1 theme park brand. Families are going to come back to Disney. Whenever they put out the next Disney movies, Avengers or Pixar or whatever it is, people are going to go see those. I'm not worried about that company in the long term at all.
Greer: Okay. Well, there you have it. Dan Kline, thanks for joining me.
Kline: Thanks for having me.
Greer: As always, people on the show may have interests 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.
That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we will see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Walt Disney. Mac Greer owns shares of Amazon, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool recommends eBay and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.