The World Doesn't Need More Software Businesses

The market has changed...

The past two decades were marked by a chase for yield fueled by lower interest rates, which drove up the prices of junky assets. But now, this chase for yield and speculation has pretty much turned on its head.

As a whole, folks don't want to own speculative tech companies that don't make any profits. They don't want nonsense with no assets and no competitive "moat" to fend off rivals.

One of our favorite descriptions of this state comes from the macro strategists at Clocktower...

The world does not need any more [Software as a Service ("SAAS")] businesses, it needs physical infrastructure, which has not been as aged and decrepit since World War II. As such, amidst an orgy of [capital expenditures], spending on tech has seen no increase, largely languishing at 2010 levels.

This is not what the tech bros (and sisters, to be fair) want you to think. Supposedly the way to fix all of the world's problems is through enterprise software, which ought to be even more powerful thanks to the advent of AI...

They will spin the same yarn that SAAS businesses are a game changer, even though we struggle to think of a single SAAS business that has actually contributed to productivity growth since Microsoft introduced Excel in 1994.

Or perhaps a less entertaining, but broader viewpoint from financial-services company BNP Paribas...

The last twenty years were marked by several dominant global trends: disinflation, ultra-cheap/free money for borrowers, and the global production of raw materials and goods & services that suppressed prices.

Since 2021, there has been a 180-degree turn. The COVID-19 pandemic, the ensuing economic stimulus and escalating geopolitical tensions have ushered in a new environment of high inflation... sharply rising interest rates, and a reversal of globalisation...

These shifts are not temporary but structural in nature. The new economic era requires a completely different investing mind-set.

But don't fret about a changing market. Position yourself for it.

Value is back. Commodities are back. Hard assets are back. The big industrials are back – stocks no one wanted for years. And dividends and income are back, big time.

We know that professional investors have a higher appreciation for dividends. They've been buying up high-dividend payers for many months now.

And the government is butting in to benefit dividends further... For a few decades now, companies have favored stock buybacks over dividends because of the tax treatment. If a firm wanted to return $1 billion to shareholders, doing it as a dividend would lead to income taxes for shareholders. Using it to buy shares and retire them was tax-free.

However, as part of the Inflation Reduction Act of 2022, Congress enacted a 1% excise tax on all share repurchases. Now, when a company buys back shares, it owes a check to Uncle Sam.

A recent proposal raises that tax to 4%. We don't know if that will pass – it most likely won't – but it's already making companies think about how to return their profits to shareholders... and the expectation is that the tax will eventually go up. Maybe not 4%, but 2% or so.

Please don't be that investor who only focuses on growth and ignores one of the best drivers of long-term investment returns... dividends.

Dividends and income are back. Invest appropriately.

What We're Reading...

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
January 10, 2024