Retail's ups and downs. August 25, 2023

33:50Sales are falling. All on the discretionary spot because everyone's paying more on their, well, let me be careful. A lot of people are paying extra on their mortgage, not everyone. In fact, half of the mortgage cliff is yet to roll over. We keep talking about this cliff. It's not a cliff. It's a series of waves and there's a lot more waves to come. In fact, the bigger one - It kind of steps down, right? Like it's, you know, it's going to, every individual person falls off their own cliff. But because it happens over an extended period of time you get a week's worth of it another another week another week so you kind of this stepping down over time of more and more mortgage or stepping up if you want to think about the the costs of them but trying to keep in the cliff metaphor but you're right there's no single event it's it's a range of sequential events daily weekly over the next 18 months yep and so we had we talked about cba westpac had their results out recently same thing same exact thing you know they're they're all as politely as they can sort of pointing to this i mean it is the elephant you can't talk about the australian economy the australian share market without talking about that and you don't need me to tell you look look at your own situation dear listener i mean what what do you spend most of your money on i guarantee you it's rent or your mortgage or you're happy to be in a fortunate situation where you've paid off the majority of your house if not all of it and you belong to a certain demographic in which case you're a bugger i'm very jealous and envious of you um do we like our listeners no i'm just you play the cards you've got right well done to you but but it's my my point is is this bifurcated economy and that it really is everything and and and even when you look at woolies and coals which are non-discretionary you can't i can live without the louis vuitton handbag i can't live without food right and we had food price inflation of something like six to seven percent over the year i think a lot of them god the financial reporting is so asinine so annoying but anyway expect i think there was a lot of people like sharpening the knives ready to sort of go ah bastards i'm the last to defend them right because they are bastards in a lot of ways but but um the results weren't great and coals in but i haven't had a chance to dig through woolies yet but coals their costs really surprised everyone like just shot through the roof here so i was like yep the uh the price of of your eggs and your milk and your bread and all that have gone much, much, much higher.

36:08They haven't actually done that well as a result of it because A, they're paying suppliers more. They've had to pay their staff more for new wage agreements. They've had to account for the entitlements that they've got to deal with more. So there's a whole bunch of extra sort of things that are in that. But it is interesting though, isn't it? And they are, so again, non-discretionary is broad term, but I noticed that Coles was sort of saying actually we're noting that we're doing much better in the home brand segment now that's good for them because it's a market but but what is what does that say to you it says well i'm not buying the the more expensive stuff i'm i'm buying the cheaper stuff um and they're also saying actually people are eating outless so this is i mean goods i mean this is why these companies can be are considered reasonably defensive because of these factors but what is it telling you it's telling you that a lot of people are doing it tough no one's eating out nearly as much as they were before everyone's down going down the the the quality spectrum if i can put it put it that way um uh it's tough out there it's super super tough out there and and again your direct experience like if you've got three houses all paid off and you've never had it better um if if you're trying to pay off a mortgage or you're paying rent then you've probably haven't had it worse for a long long long long time and i yeah i think it's going to get tough but that's first level thinking the second level thinking and i know this is what you were getting at which is yes is this not priced in correct oh i wouldn't i wouldn't say definitely to to to ultra degree of prison but but when you're looking at things particularly like nick scali and jb hi-fi and stuff we're on single digit PEs.

37:55I feel as though it's kind of like the time to sell was before now. The horse is bolted and now you're racing to shut the gate. Again, who knows if it doesn't go down another 20 % or so. But the question here isn't, is FY24 going to be tough for discretionary retailers? I mean, yeah, it's going to be tough. The question is through the cycle, what does the valuation look like relative to that is it a permanently impaired industry i don't know i don't know it's uh it's a challenge and look i don't i don't necessarily know for sure either i mean i've made some bets i own some retailers including i don't know if i mentioned adairs but i own adairs shares for the record given i probably mentioned them i think um i suspect that um if these businesses aren't permanently structurally damaged, then the share prices underestimate what the future looks like if you go out far enough.

38:54It doesn't mean share prices can't fall. In the meantime, it doesn't mean SARS might get worse. In the meantime, I think they will. I think FY24 will be a tough year, reported year for all of these discretionary retailers because of things we've just talked about, about who's spending, where they're spending and how much we've got to spend. And that's going on. I wouldn't be surprised if the RBA started to cut rates in the first half of the year, towards the end of the first half, maybe later in the year might be even 2025 no predictions i'm just saying i wouldn't be surprised if it happened um and that might kick some things back into gear uh we've certainly got plenty of migrants coming to the country so that'll that'll help consumer spending to some degree as well although a lot of that's going to go into house prices so uh choose your choose your you know your inference uh accordingly i'll come i'll come back to that but i i want to call a bunch of bs on that but yes come okay um so yeah i it's just it's just it's worth thinking just thinking through what's going to happen or what might happen.

39:45But again, we're kind of almost back to the tech thing a bit. Like the market's hating on these stocks right now. And maybe for the right reason, maybe the prices are perfectly valued. Maybe they're too expensive. Maybe they're overvalued already. Maybe they should fall further. But if you look back, and I've said this before, we've done a lot of work on retailers looking back to 2019. And not you can take that and assume nothing's happened in the meantime. But if you look at a relative growth of these retailers, assuming, and you shouldn't assume this only, but just as a starting point, they haven't lost share, then they should have grown sequentially by, you know, a few percent a year generously to now.

40:20And then a few percent a year into the future, if you kind of do that, you know, look through the booms and busts of the last four years and what's probably going to be a bust for this year, they're not particularly expensive in my view. But again, I could be entirely wrong, I'm not saying buy them, I'm just saying, but also just be careful with things like center, right? Like my personal view is that physical retail remains under serious long-term pressure now i could be wrong by that but if i'm right then don't just take the 10 percent as oh westfield they're selling it as you know we've unlocked the key to getting people to shop in stores again it's like well no kind of covid just finished and people went back to the shops and you know you the management always blames something else when things go wrong and and take the credit when things go right and they might be right i don't want to i don't want to blame or have a go at uh at census management but just just be careful that the underlying trends i think this is my key point is the underlying trends will be there um you know the things about think about a share price graph right top bottom left to top right for the market so let's set the whole market's not every company over that time lots of wiggles lots of squiggles we talk about altium right all that stuff um the business's long-term results will determine the outcomes and that'll be impacted by the the ability to take advantage of the circumstances they find themselves in my best guess is we haven't hit peak e-commerce yet i think more people will find more opportunities to buy more things online over time.

41:37If that's true, then you want to be mindful of those businesses that are geared up for that and those who potentially aren't. And there's a reasonable argument to be made, I think, that those who believe e-commerce is dead or dying or flatlined or matured, I think they'll end up being wrong. But again, I could be wrong. No, you're not. I don't think. No, I guess the thing is with those statements that I think people misconstrue is one of time frame. And I'll use the well-used example of the internet. In the late 90s, everyone was talking about how the internet was going to be huge. And they were absolutely right.

42:18We didn't know it was going to sort of take 20 years before it became significant. And then we sort of look at it now and go, oh, now we have the internet. Not having any clue that we're still at the dawn of the information. like this is this thing has got so much further to run um so i think you're right i think there will always be a place for physical retail and people will make that argument but there is there is a difference here when you're looking at retail between in fact this is this is true of most industries the real skill i think as a long-term investor one of the core skills is distinguishing between what you would call a cyclical factor and a structural factor and again i know i've talked about this before as well but bears repeating there are there are the my pick on myers right of the world which the department store model i think is pretty much fundamentally broken and on the way out you know i agree completely westfield westfield has destroyed that that that model so that's that's a question of oh well things are tough because you know no one's spending money in shops anymore it's like yeah that's true but it's also because you're just less and less and less relevant you know so anyone who's going to get into the newspaper game right now or the fax machine game or the pager game or whatever you know the horseshoe game or whatever it is it's sort of like yeah there might be swings and roundabouts in the economy but you are sailing into a very stiff wind that is not going to abate ever in fact is likely to get stronger and stronger and stronger so you have to understand the difference on that so when you're talking about what you're talking about i think yeah that is a wind that's going to get much stiffer over time it's but it's just it's going to take a long time to to play out and and and will evolve so i think because i remember i remember people making like you know uh whatever kogan or amazon or any drink any of these sort of companies have been sort of discussed people will sort of use these kinds of things make make arguments in reference to these kinds of things and expect that in two years time it's played out like no that's that's that's the thing to to be mindful of there i think um so it's just it's just not going to be a quick thing um what was i going to say oh just on the just on the housing thing oh no you housing really so so i i told you before we recorded i do a little bit of um hate reading i don't mind a bit of hate reading you know so I'll look up annual reports of companies that I don't like and just purely to cherry pick and stoke my confirmation buyers.

44:45I know what I'm doing. I'm not proud of it, but I'm just being honest with you. That's what I'm doing. And I looked up McGrath recently. So that's a real online, sorry, a listed real estate agency. Anyway, they had some pretty damning sort of numbers in there volumes fell 20 over the year profit was absolutely smashed house prices were down i think five percent across the board three percent across 3.7 i think across their network anyways figures i liked i like to sort of see but what was interesting is john mcgrath was sort of saying that everything is going to pick up um because of migration and you hear this again and again and again and again and i think what is i would question is that i think people who are going to hang their hat on migrants saving us need to think a little bit more detailed about it if you're saying we took the other day that i think we're bringing about a canberra-sized population into the country every year yep okay and that's a large number that is obviously going to stoke demand right it just is like okay but that again first level versus second level thinking if those 400 000 people are investment bankers and surgeons yeah that's going to be great housing they're not not all of them at least and in fact we have figures on this you can google it i was busy googling it before when you were talking and you have nurses you have teachers um uh you have uh mental health care workers you have uh you know deliveroo drivers and then that we are bringing in people who who obviously find australia a very appealing place obviously and i'm i'm on the record is saying i i feel as though let's you know give us give us your your best and brightest we'll take them you know it makes us stronger overall um but but they're not the people who are going to be just easily buying one and a half million dollar properties for a two-bedroom crap hole in in the in the inner west just it's not right and their banks are not going to lend to these people so i I just feel as though while on a net basis, yes, I don't see how the cohorts that are bringing in are somehow coming in with millions and millions of dollars on incredible credit ratings that they're going to continue the Ponzi going for much longer.

47:08Yeah, I... Controversial or not? Yeah, oh no. I don't think it's as... I think it's as black and white as that, mate, because I think there's a... Ratchet is the wrong word. I can't think of the right word. that there's a you know when you add someone when you add someone at the bottom it pushes everyone up a rung or a bit um i think like the property ladder rungs i shouldn't use rungs um you know is is the migrant going to buy the million dollar house no but is the migrant going to do this job and then that it grows the economy someone else gets a job because they spend that money and everyone's a little bit richer and so the person who's going to buy a nine hundred thousand dollar house now buys a million dollar house you know that there is a there is a potential for um not the rise of the lift or boats but just you know if the economy grows and they're added to demand And that's how economies get bigger over time anyway.

47:48So there is a natural upward pressure on asset prices as a result, particularly with limited supply, which is the other thing we've talked about plenty of times in the past. So, you know, add more population. Everyone's got to stretch a little bit more to get a house because there's only so many houses to go around. You know, does it support prices at some level? Yeah, maybe. I think, you know, the increase in short-term demand. It definitely supports. It definitely adds to that, right? Like it is in favor of that purely because of the added demand. No question. But there is a mathematical reality of like, to what degree?

48:20Now, there's not to say that there will ever be a vacancy rate that's beyond a slither. There never will be. But that's a difference between me expecting that I'm going to get double digit annual gains from here to kingdom come. Like that's the difference that I would question. Yeah. And again, that's a really, really important difference because I'm not saying that either. But I'm actually going to save the thing maybe in the short term. If saving is preventing collapse, possibly, yes. So we probably have to define our terms and be clear with what we're trying to say here. I'm not for a second saying that migration keeps property prices increasing at historical rates.

48:58But I think to whatever degree there is risk on the downside, I suppose, which is risk, that the price may fall. growing population mitigates some of that risk. Maybe not all, maybe it still falls in a heap. I'm not making predictions, but all things being equal, more people rather than fewer people is going to do a better job of mitigating against potential falls and those calamities that may come if there wasn't that in place because we're taking in people faster than we're building houses at the moment, which is just the reality. No, you're right. And there's the nuance, right? No, it's just, you never ask the barber if you need a haircut.

49:36That's the thing. And don't ask John McGrath what he thinks the property market is going to do is what I would say because he is going to say oh it's tough now but it's going to get really better and um uh because x and because y and like things that like will as they sort of hit your brain you'll go yeah it makes sense right but but then on reflection that there is there's a lot more complication to that and I feel is it is especially in the context he's talking is it's not just about overall does it add a little bit of support yeah it does but they are very much saying and a lot of people at vested interest are very much saying oh no no no that is that is going to go back to you know your property doubling every seven years or whatever nonsense you know rule of thumb people come up with that's what I that's what I question and I will say very quickly to just maybe bring it back on on topic um i did notice that coles mentioned immigration as well now for these guys absolutely yes absolutely right and like that is straight up yeah 400 000 extra people are gonna eat right they are going to eat guarantee and and that is that is absolutely going to be a a a positive for them uh and it's it's it's demand that that otherwise wasn't there and and they don't have much choice in terms of whether they'd want to eat or not so that's yeah that is that is a that is a positive yep i i think that's probably right speaking of mate uh westpac was out this week and they talked about the um a modest in their in their words deterioration in bad debts now uh deterioration bad doesn't mean fewer bad debts it means obviously more bad debts um it it suggests that i think if this is this is i'm not i'm not a forecaster i don't really care to try and make a forecast but i would say that there is no surprise that the economy is doing what the rba is trying to get it to do which is slow down try and take some heat out of inflation um that it's very very clear that's what they wanted to do they want us to stop spending we're seeing discretionary retail sales fall we're seeing in westpac's own words a modest deterioration in bad debts there are people who are suddenly um as you say not a cliff but individually unable to pay the mortgage pay the bills and there are people who've been able to dig into savings to to you know find ways of paying it thus far but at some point the music stops they'll try and work out what comes next and i think that's um i think that's a just a reminder if you kind of triangulate some of this stuff we have got a slowing economy i don't know that we'll go into recession i don't know that we won't um but it's doing what it should well what's happening is what should happen i guess is my is my broader point right so on one hand it shouldn't be a surprise on the other hand it should be a bit of a wake-up call for everybody who maybe just wanted to believe head in the sand that as long as the music kept playing no one would take any chairs away and i think that's what we're seeing with westpac's numbers good profitability this is the other thing by the way we've talked about this before but the last six months very different to the last or the six months of june january to june very different to the last two months or month and a half in july and august and the trend of that you know even over that six month period when you take a six month number and say i did this during the six months it isn't very rarely six equal months so if stars are up five percent in the year or the half they might have been up ten percent in january and flat in june average up five percent looks pretty good but you'd miss the trend and Some companies are releasing that quarterly data or telling that story, but it's not any more stark, I don't think, than the outlook statements, so-called, the guidance, and or the updates to what's actually happening out there.

53:20And it seems that Westpac is saying what others are saying, which is people aren't spending, people are struggling to pay their mortgages, the RBI is having the impact it wanted to have. This is where we are, not surprisingly, and unemployment is starting to rise. Yeah, I mean, I think it was really pretty clear in what they were saying, actually. Now, to be fair, the rise in bad debts is still tiny. I'm going to make up the numbers, 0.8 % in arrears of their loan book, like tiny, tiny percent, and not out of whack with historical standards. So it's increasing, but it's still very, very low. The point I would make is that these all tend to be pretty backward-looking things.

54:02I, again, made a quick point to you off-air before. It's like the unemployment rate. People will go, oh, look, the Australian economy is really fine. it's only 3.7 % or whatever. Actually, it was up a little bit, wasn't it recently? But still ridiculously low. But of course it is. You look at any recession throughout history and unemployment was always low before it hit. It's the recession that causes people to lose their jobs. So it's a backward looking indicator, not a forward looking indicator. And the same is with these arrears so what do you look just think about it rationally like in your own situation you will cut everything before you cut your mortgage because you probably value not sleeping on the street um you know like housing and shelter is important so that is the last thing to go um and and so you know should we be expecting these huge rises and things no not yet and they made westpac again made also the points actually we're not even halfway through this so-called cliff yeah so it's gonna get worse um the other thing that was interesting um uh their net interest margin was down now net interest margin is very simply well how much do we pay for our money versus how much do we get for the money that we lend out a bank is just like any company except that stock and trade is money.

55:27That is our product, right? We have to pay to make it and we get money when we sell it. That's pretty much what it is. You buy at cost, you sell at retail, you make a margin of the difference. That's what banks do. That's exactly it. Now, they're actually down a little bit because they all got very competitive for a while there. And then they all, again, I am not saying collusion here because it's not. I don't think it is. No, it's absolutely not. I guarantee it's not. It's very easy to do that. But what it is, I would argue, is just it's game theory playing out exactly as you could. You don't need to collude, right?

56:01You just signal. Imagine if you, me, and two of our mates were the only game in town, right? We don't have to have a secret meeting in the middle of the forest in the dead of night. I just go, oh, Scott's doing that. Well, I guess I can maybe not do that. We are all going to act in our own selfish interest. but we're all going to be signaling to each other indirectly and we're going to be doing our thing. So they've all now done that and they've all said, okay, let's stop doing that because that's sort of like not helping us and our net interest margin is going down and down and down and down.

56:33It's at 1.8 something percent or something at the moment for Westpac. So it's a very thin slither here. The other thing that's if you want to nerd out for a little bit with banks is that they borrow short and they lend long as well. So this is more of a factor in the US where you have very long fixed rate periods. Yeah, that's right. But it's very difficult. So when you say you borrow short, it's deposits. In an ideal world, it's not in Australia because we don't have enough deposits, so we borrow the rest from overseas. Oh, man. Which we've been doing for 200 years. We've always been a capital importing country.

57:11We always needed someone else's money to do the things that we wanted to do. Well, I say, oh, man, because it just feels like I think we too often think is that we're immune to what's going on. Yeah, that's true. And interest rates are going up. They're going up in the US. I know that Philip Lowe's decided to pause things here, but they are going up. And we'll find out what happens. We might not be pausing permanently, so we should also allow for that. Here's the other thing, right? We all look at the Fed and central banks. It's the bond market. Everyone, it's the bond market, right? You can't force people to give loans and lend money.

57:42You can't, right? Not in the free market system that we have. So the bond market is really calling the shots here. And the Fed likes to do a few little things here and there to sort of pretend it's a bit. It's like the, you know, it's like the four foot five guy amongst a, you know, group of giants like screaming loud and huffing and puffing and stamping their fears. Like you are a factor and a powerful factor and an important one. But there are other bigger forces at play. And we've seen inverted yield curves. We've seen what's happening. over there. And so the banks are looking at, they're plugging their funding at much higher rates.

58:17They're going to be competitive. And just given what is happening with official insurance, they're going to have to pay more on their term deposits and their savings accounts and these kinds of things as well. And so they need to balance this kind of stuff out. So there comes a point where you can decide to wear it on the chin to make sure that you don't throw a bunch of your customers into arrears, because that's not good for anyone. And it's certainly not good for you. But there comes a point where it's just like, well, we actually go insolvent unless we pass on some of the pain here. And they're getting into very, I think, they're getting into, again, I'm not chicken little here.

58:54I'm not saying it's all the sky's going to fall in, but they are getting into very troubling times. And we've seen what's happened with some of the regional banks in the US. That problem hasn't gone away, by the way. They were just sort of bailed out, essentially. So it's going to be interesting to see where all of that goes, particularly as things, particularly with what we've been talking about here, we're seeing all the signs from the retailers that it's getting really tough. We know that all of these things are rolling over. We know cost of funding is going up. And then I continue to look at it and I say, man, you could have bought Westpac 10 years ago and you would have paid 32 bucks a share.

59:31It's less than 21 bucks a share now. So we've really got to slap people around the face here to stop considering these things as bulletproof. We haven't had any trouble in that period, really, in terms of, you know, there's been no real recession in that period. And banks are hyper-cyclical. They are the definite. We just don't. We forget that because we haven't had a proper recession. Exactly. But they are. Trust me. They're very, very cyclical. We're about to learn a whole little lessons. Westpac nearly went under in 1993. Yep. Right? Was it 93, 92? It was in the early 90s, yes, definitely. So you've got a situation here where it's like, even like, in fact, we should very much throw in dividends here, but what a terrible investment that has been.

1:00:15And we haven't even had really tough times yet. So I don't know. I don't know what my point is. I think that's right. I will add my usual disclaimer that we shouldn't blame a company for the market's response to that company. Altium, we could have said Altium, oh, it's been a terrible investment. Shares were 45, now they're 25. What a terrible investment. They go back up. We say, oh, look, what a great investment. We need to be a little bit careful to not confuse the two. But we can blame the market, right? Yes. And I think that's who – and just sometimes we need a little bit of shaking out about there are these truths, quote, unquote, that we – sacred truths that aren't true.

1:00:50And I like – you know, like, just I'm not – this isn't an opinion. This is fact. I know anyone who bought the banks in the late 90s through to the mid-teens, 20-teens, had some of the best investment returns you will ever see from big blue-chip companies. And now it's become this idea that these are blue-chip, indestructible businesses. That's really not been the case for a long time. And I just want to make people aware of that. That's absolutely true. again just for the sake of it it may be the market well no it's just maybe the market's wrong now right so the price goes back to 40 and we look we're telling reference story in six months time that probably won't i'm not maybe i'm not suggesting it well i just i just making the point that we need to be careful about drawing conclusions from share prices because when they turn around you draw a very different conclusion that wouldn't fundamentally alter the underpinning business which is exactly your point i just i always kind of blanch a little bit when we use we use share prices to make a case in either direction because we both know very well that things can change very quickly when they do um we can either look like geniuses or look pretty silly and i think that's that that's part of the story you're right the market maybe it was stupid to pay 40 back in 2015 maybe it's stupid to only pay 21 now or the reverse and maybe these were great businesses 10 years ago maybe they're not as good anymore or or whatever's going on there what i would say and to your to your core point is these what got them here is very different to where they will go moving forward because over that 10-year period they or more than that whatever it was um they gobbled up market share so willies and coals have done the same thing by the way over over 40 years i think i've said this before too but um willies and coals were 20-ish percent market share each in the early 80s now the growth if you look at the share price growth so wow will he's gone for two dollars to 30 something dollars what an amazing business it must be doing something right it did do something right but the circumstances that existed before and during that growth don't exist now.

1:02:45Woolies can't go from 20 % to 40 % market share again. They can't go from 40 % to 80 % of those coals disappears and it's not going to in all likelihood. So just be mindful of changing businesses. Some have really long growth runway. It's sort of an Altium, right? The growth runway of a business like that, it's smaller. It's got a global market, whole lot of things going on. Woolies and coals are really high quality businesses, but they're not growth businesses anymore. Short of them going overseas again and trying that for i don't know how many years time but they get wrong every time they try it the you know the circumstances don't exist anymore you can't you know banks and and the supermarkets as long as they stay in australia can't grow as a group more than system growth maybe they have a little bit of share from iga and maybe aldi you know goes from 7 % much to 6 % or something maybe the banks managed to i don't know get rid of the regionals or something pick up a couple of percentage points but now you're stuck at system level growth and that's where i'm not a macro guy um i don't really I never do top-down analysis, but it is worth thinking about the market they operate in and how much headroom there is for that growth.

1:03:48Maybe CBA can take a couple of share points from ANZ or ANZ from National Australian Bank or National Australian Bank from Westpac, but you're kind of talking tiddlywinks a little bit, right? You're already prepared to pay poor. So just be mindful of how much potential or lack thereof still exists in that market. Look, at least with Westpac, you can go, okay, it's a 6.7 % fully frank yield. It's near enough 10 % if I add the franking credits in. And, you know, that's, geez, that's pretty good, actually. Maybe I don't need any capital growth. In fact, if I can buy my shares at$37 and, sorry, whatever they are, forget the share price, and sell them for the same price in 10 years' time and I just get that dividend, that's not terrible, actually.

1:04:26That's actually pretty decent. But, again, you always have to ask, what is the other person of the trade thinking? Why is the market who scrutinizes, and I've just said before the market's often not rational, so maybe that's the case. But it seems like a lot of people are just like, no, I don't want – no, thanks. I don't want a 10 % grossed up yield. And the only way to square that, whether right or wrong, is that you, I assume, expect that dividend to be cut at some point. I don't know how else you reconcile that because why would you not take that yield? So that's a bit strange or not, depending on how you look at it.

1:05:06Yeah. What is strange, and I know I'll bang on about this again before, it's like, is Woolies a great company? Yes, I think it's one of the best companies on the market. Will it be around in 10 and 20 years? Yeah, almost certainly. Will it be a bigger business then? Yeah, I'm sure it will be. But all the points you've just made, I think, are really worth thinking about. And then you need to think about these guys are trading on a price earnings multiple of 27. Yes. What do they do? Do they manage to grow their net profit by – you've got to think of continuing operations here because there's a few – Is it college you're talking about now?

1:05:43No, Woolies. Oh, Woolies, okay. So they're mid-single digits. Yeah, mid-single digit. So that's what they're growing at in this current year. Let's say that's – by the way, if they can sustain 4 % or 5 % for the long term, that's an incredible effort. Like that is above the size of the economy. So they're either just getting super, super efficient or they are winning market just one of the two. That's right. One of the two. Or they're getting into another segment altogether. And they're doing that well with a decent return on investment. That's the basic maths of the scenario. And yet the market there is going, actually, I'll take a 2.6 % fully frank yield on that.

1:06:18Thank you. Like, what? I'm getting 4.5 % in a term deposit. Zero nominal risk. Yeah. I don't know. I look, I wouldn't, I just can't, I can't wrap my head around. The only, I said this to you before I fair, my only explanation for it is that people are looking at it as a capital preservation play. In other words, oh yeah, it's not, it's not sensible in any kind of valuation universe that you can look at, but we're pretty scared on the macro front. Woolies ain't going to go anywhere. If we sort of in four or five years time have only managed a low single digit return, but we have preserved our capital, then we will do that.

1:06:59We should say too, by the way, there's no guarantee of preserved capital. Woolies has fallen from$30 to$20 in the past. So just be careful about assuming that's doable. For me, it's also that I think there's a – what shares offer, or good quality shares offer, is generally a growing income stream. So cash in the bank might earn you a set percentage on your capital. You don't get franking credits, by the way, so there's that, but also the ability to kind of say, okay, well, I'm getting whatever the dividend yield is. Now, I figure that Woolies will be bigger in 10 years' time, and so the dividend probably will go up over time.

1:07:31And so I can put my money away and get a growing income stream, a growing annuity stream almost. And that's kind of the idea. It's interesting, though, with Woolies. I'm just looking. This doesn't have the latest figures in it, but they paid$0.92 in dividends last year. They paid$0.91 in 2018. Maybe it's up a little bit this year, but that's not growth.

1:07:58anyway no i'm saying that you might you might have a view that that could be that that could be the future i i think it's i think it's why the woolies and coals don't grow their dividends over the next 10 years i mean it's unless they unless they don't make any extra money i find it hard to believe in a market with growing population growing gdp you'd assume they'd be able to grow profits at a gdp-ish kind of rate which is not spectacular but i also imagine if you said okay i can buy shares in woolies or coals i can put the money away now um i probably will over time not lose my capital and I'm going to have an income stream for the remainder of my retirement or something else that will grow modestly over that time.

1:08:34I can understand that being a strategy is all I'm saying. It would make sense to me that - Yeah, yeah, absolutely. Look, I've got to be careful what you say because it's easy misinterpreted. So I've talked about this before. A really nice rule of thumb if you're ever dealing with dividend stocks, I think it's Gordon growth formula. It's very, very easy. Take the yield. So 2.7 % for Woolies and add to that the rate of annual dividend increase that you expect. Yeah. So let's just go just, I'm just, you use whatever number you want to use, dear listener, but I'm just going to go with what your suggestion was, which is, you know, about GDP growth.

1:09:09Let's say 3 % long-term average kind of thing. So what that suggests is 2.7 % plus 3%, 5.7 % total return. It's better than a kick in the teeth. It ain't great. And it's probably less appealing if you suggest a higher than average inflationary environment, which is sort of my default position. I'm not saying that we won't come off these very high peaks, but I think 2 % is a long way off. But let's call it 2%, right? If you want to, let's call it 3 % maybe to be a bit more realistic. But it's sort of like in net real inflation adjusted terms. Again, I'm preserving my capital. That's the only rational argument here.

1:09:52And people are like, I don't care because things are scary. I just want to park my gazillions of dollars somewhere in a nice liquid listed company that's hyper defensive. And, you know, in real basis, I might get to 3 % per year over the longish term. I'm sort of happy to do that until the storm clouds clear. I think that's fine. But I think if you're an investor looking at 2 ,000 different opportunities on the ASX and you're saying that I think Woolies is going to give me an incredible return. I just don't think you might be. I agree. Again, we're saying the same thing. I'm not defending it as a higher return market-beating investment.

1:10:28I'm explaining why I can imagine. I'm thinking a group of people, and there might be enough of them. You only need enough true believers who say, I won't sell regardless of the PE because I like the company, I trust it. I think I'll get a growing income stream at some level if there's enough of those. We've seen that before, mate. We've seen it in plenty of companies. um well i mean the true believers um they sometimes get shaken out maybe they never do um but you know the bank shareholders we've just talked about right like this there's people who just like i i will not sell these shares no matter what you do to me uh and they will still say by the way despite the fall of westpac share price i've had an income stream of x over that period of time i don't know whether it's growing or not i imagine it's been a bit volatile particularly with the um the covid kind of you know pause and dividends and stuff so i don't really know what the what the line looks like on that one.

1:11:14But, you know, I can imagine people simply taking the banks and saying, I've got a dividend every single year except for COVID and I've paid this and I've paid that and I'm happy with what I've got and the share price down, I don't really care. In that scenario, you're not going to have people sell it and, you know, this is... Again, we want to be really, really careful here because we don't want to be talking about two different things and disagreeing. We're actually agreeing on both of them, which is, you know, there's no reason Woolies shareholders will need to sell. well, there's no reason woolly shit, you can't say that high.

1:11:43If enough people are happy with what the bargain they're getting for it, we'd also say at the same time, don't be mistaken in thinking that's a market-beating return or it's anywhere near the best return you're likely to be able to get from the ASX over any extended period of time. Well said. Well said. Should we finish up? Yeah, probably because I'll find a way to circle us back to property and then we'll be here for another half hour. Thank God we haven't discussed that other topic. Don't say it. Will you come back on Sunday though? Yeah, looking forward to it We've got some great questions I'm looking forward to it too Until then Have a wonderful end of the week And early weekend We'll see you Sunday And Fool on Cheers The Motley Fool And people appearing in this program May have positions in the companies mentioned General advice only Please speak to your financial professional To understand how it may pertain to your situation Subscribe to the free newsletter At fool.com.au Forward slash listener The Motley Fool operates under Financial Services Licence 400691.