Should Retirees Buy Netflix Or Walmart?

11683615_sI was at the softball field last Wednesday evening with Jill to watch Sophie and Phoebe play against Wareham. They got crushed. Sophie was pitching, so my anxiety level was a bit high. As I was giving her some fatherly advice from the sidelines (she loves that), a very nice older gentleman came up to me, introduced himself as Jack, and asked me if I was Jeff Cutter. I asked jokingly, “Why do you want to know?” Heck, you never know how that conversation will go, right? Jack smiled and said that he religiously reads and really enjoys this column in the Enterprise. Jack was at the game watching his granddaughter play. After some small talk, Jack mentioned that he recently read an article online arguing that Netflix is “undervalued” by half of its value. Jack wanted to get my opinion on whether he should sell his Walmart stock to buy Netflix. Well, as I told Jack, the two companies’ models could not be more different. Netflix, of course, is an Internet company earning revenues from paid subscriptions and online advertising. On the other hand, Walmart is a traditional brick and mortar retailer. Jack wanted to know if retirees should own Netflix or Walmart in their retirement portfolios.
Hmm . . . let’s think about this for a minute.
I explained to Jack that in the world of index funds in which we now live, it is very likely we all own a little bit of both companies’ stock. Nevertheless, this is a question worthy of some thought and consideration. So I picked up my cellphone, hooked into the web, and began to analyze the situation.
From a glance, Walmart has had a dividend yield of approximately 2 to 3 percent, and an average growth rate of about 5 to 7 percent for the last five years. It has gone from a stock price of $55 per share to about $70 today. Netflix, on the other hand, does not really pay dividends as the company’s focus is on growth. Since 2010 the stock has jumped tenfold, from about $60 in 2010 to over $600 today! This would imply that Netflix is, or at least was, a better investment from a growth perspective. I will bet
Jack and his wife, Alice, could live quite comfortably if their entire portfolio grew at such a rate!
Yet if we stopped our analysis here, we would be missing a very important point. As we have all come to know and experience, achieving financial rewards from our equity markets does not come without market risk. One of the most important threads of information often left out when we create an investment system, is risk. Risk is defined in the financial world by a term called “Beta.” One of the things that Beta measures is the volatility in the price of the financial instrument being evaluated. Just as I finished mentioning this to Jack, he nodded his head in understanding and shared with me an investment story from his younger days. He told me that he and his wife lost 90 percent of their investment in a cellular startup company. He explained that the stock looked very promising until a larger company started competing with the smaller startup and drove it out of business. Jack and Alice sold for pennies on the dollar. Jack went on to say that they were devastated. It took them over 15 years for their portfolio to recover.
In 2011, Netflix’s stock price fell from about $250 per share to about $65 per share in six short months! For those math majors out there, that is about a 75 percent swing! Further, some might argue that going forward, Netflix’s value is unsupported due to the lack of infrastructure, or at least the lack of barriers to entry into its market place. Arguably, this could lead to competition as well as, you guessed it—a potential plunging stock value if or when other companies enter the online subscription video market. Others might argue that Walmart is burdened by and slowed by the massive amount of cost associated with maintaining its infrastructure to sell goods. Specifically, Walmart stores not only represent a huge investment, but they also limit the company’s mobility as markets and consumer preferences change. So in either case, risk is present as is the possibility of losing one’s investment.
Jack understands that all investments have potential rewards as well as risks associated with them. And Jack has been reminded about the lesson he learned as a younger man, that investments can be risky. But again, we cannot stop with an analysis of only the investments themselves. We must factor in goals and objectives. Basically, there are two sides to every individual’s financial life cycle, accumulation and distribution. And the investment philosophies associated with each are vastly different. In the accumulation phase, or our working years, we can afford a little more risk because we have time to recover. In addition, in our accumulation phase, our investment philosophy centers around “dollar cost averaging.” This is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. In the distribution phase, retirement, there is no “do over.” In the distribution phase, capital preservation is the cornerstone of a sound investment policy.
You see, as we age and enter retirement, the fundamental goals change from accumulating wealth to preserving our wealth. In addition, we also must focus on drawing down capital from our portfolios, either to meet income needs or to comply with required minimum distributions that kick in at age 70 1/2. When considering the need to take distributions, having a swing like the one that Jack experienced in his accumulation phase would be devastating. Oftentimes I see portfolio construction that is still designed for an accumulation strategy when it should be in a distribution strategy.
After our conversation, Jack had a better understanding of the questions he should be asking. Is growth the only criteria to look at when choosing an individual stock? Are we entering our distribution phase? Do we need liquidity? What is the associated risk of an investment?
Jack came to his own conclusions. Walmart has been more stable from an investment perspective, it provides liquidity through dividends, and it may better fit a retiree’s goals and needs. As sexy and glamorous as Netflix is, it may not be the best stock to hold in his portfolio.
Folks, I am not saying to rush out and buy Walmart or, on the other hand, not to buy Netflix. Rather, what’s more important is to understand the process by which strong investment decisions are made. We must always ensure that we identify the critical points, and know the questions to ask ourselves, so we can make strong financial decisions.
Heck, within your retirement system would you rather get rich, or secure your financial future?
Be vigilant and stay alert, because you deserve more.