The Red Folder

Archived from February 19, 2024

Key stories for the week, brought to you by the distinguished newsman Sasha Morel.

Reading for the sake of reading sucks. Telling yourself to read to win a round is nice but ineffective. This condensed news brief helps you understand current domestic and international issues, analyze the news, and gives you opportunities to read more.

Domestic Stories

3 key domestic stories for the week:

1) Meta's Milestone: A Return to Dividends Marks a Shift in Market Sentiment Sasha Morel

Meta commemorated its 20th anniversary this week in a manner befitting established businesses: by distributing dividends to shareholders. Instead of a grand celebration, the Silicon Valley mainstay observed its coming of age through a stock buy-back and, for the first time in its history, the issuance of dividends. Shareholders are set to receive 50 cents per share, prompting a lively response in the markets, as Meta's stock price surged by 20%, contributing over $200 billion to the company's market capitalization on the day of the announcement.

Dividends, a financial practice dating back to the 17th century, were once a cornerstone of markets throughout much of the 20th century. Investors used the income generated from dividends to assess stock value. In the past, tools like Moody's Analyses of Investments served as the equivalent of today's Bloomberg terminal, evaluating major American rail companies based on dividends per mile of laid railroad track. However, dividends have lost their prominence since the early 1990s, yielding ground to stock buy-backs, where companies repurchase their own shares to boost stock prices.

Managers favor buy-backs because they reduce the number of shares in circulation, enhancing earnings per share and often executive compensation. A higher stock price becomes more attractive, especially when management receives stock options. Investors have also preferred buy-backs, given that capital gains are taxed at lower rates than dividend income in some countries, and owning an appreciating asset allows them flexibility in deciding when to sell and pay taxes.

Meta's decision to distribute earnings to its minority owners received a lively reception, marking a trend where markets are rediscovering the value of dividends. S&P 500 firms paid out $588 billion in dividends last year, a 22% increase from three years prior. Global investments in dividend-focused exchange-traded funds have doubled to $316 billion over the same period. An analyst at Bank of America anticipates that 2024 could be a "banner year for dividends."

The shift in sentiment can be attributed to various factors. Daniel Peris of Federated Hermes, an investment firm, and author of "The Ownership Dividend," attributes the decline in cash payments to decades of falling interest rates and Reagan-era changes to buy-back rules. As interest rates rise and the Biden administration imposes taxes on buy-backs, investors are revisiting the appeal of cash. The economic landscape today differs, with higher interest rates, struggling startups, and a tax on buy-backs. Cash might be regaining its status as king.

Higher interest rates allow investors to earn income through money-market funds, offering respectable and risk-free returns. Additionally, higher risk-free rates reduce the present value of future earnings, making some investors prefer immediate cash over potentially higher stock prices in the future. This perspective extends to management, as higher rates limit options for deploying cash, making acquisitions less viable due to the administration's skepticism toward corporate takeovers.

Investors, however, should exercise caution. While earning dividends provides a reliable income stream, economists argue that it doesn't make investors richer. Reinvesting earnings could lead to higher future profits and a subsequently increased share price. Companies issuing dividends signal confidence in future cash flows, but it also implies a lack of better investment opportunities, potentially hindering long-term growth. High-yielding dividend stocks may offer a steady income but might not deliver substantial capital gains.

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2) The EPA now Actually Protects the Environment Paul Robinson and Sasha Morel

In the four years of Donald Trump’s presidency, the EPA was damaged like few agencies are in a single presidential term. Before he was even inaugurated, he announced that he would appoint a climate change skeptic to lead the organization, a move likened to giving an arsonist the top job of the fire department. Trump’s overarching policy of limiting the expansion of the federal government, combined with his hatred for actual progress, created a dark time for the EPA. The New York Times explained that compared to the Obama administration, Trump had seen a 61% decrease in climate policy passed.

Luckily, there are very few people who care about the environment less than Trump. Biden was not one of those people and we immediately saw shifts in climate policy passed. After Trump left office, the Biden Administration nearly completely reversed everything the Trump Administration had done. The budget was increased, the attacks on state governments stopped, and policies Trump revoked were reinstated.

Most recently, the EPA heavily tightened pollution regulations on industrial companies. Specifically, they changed the amount of particulates allowed in the air from 12 micrograms to 9 micrograms. Although it seems insignificant, it is scientifically proven to be the limit at which air becomes “unbreathable”. Simultaneously, limiting the amount of pollution in the air is necessary to combat climate change, the #1 threat to human extinction.

Unfortunately, steps forward in reducing air pollution have resulted in steps backwards for social progress. Many of the areas subject to fines from the EPA are low-income communities that are supported by pollutant emitting industries such as mines, fossil fuel plants, and logging. This is forcing the EPA to close necessary employment in areas where the most poverty stricken Americans are living.

This has sparked debates coming out of many states that oppose the EPA’s recent measures on the validity of their statutes. Even in the past couple of weeks, state courts are deeming the EPA’s air pollutant limit unconstitutional as it interferes with private businesses and the “pursuit of happiness”.

Regardless of the validity of the decisions, it’s setting up the battle between Southern states and the EPA to be a long-lived one. As more states become involved in rejecting the limits and other Biden administration policies, states are playing the long-game in hopes Trump gets re-elected.

In the meantime, the recent EPA regulations are a step forward for climate progress. However their social impacts are at the core of our government’s issues with structural violence in low-income communities.

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3)Blackrock Has Called All In on Their Infrastructure Hand Sasha Morel

BlackRock's Chief, Larry Fink, has recently ventured into a substantial $12.5 billion investment in infrastructure. Fink, the founder of the world's largest asset management firm, believes in the safety and lucrative returns associated with critical assets, often under government ownership, that generate stable cash flows, such as toll roads and bridges. In January, BlackRock acquired Global Infrastructure Partners, a $100 billion fund manager led by Fink's former colleague Adebayo Ogunlesi, reflecting a broader trend of collaborations between major asset managers and independent infrastructure funds.

However, as the landscape of infrastructure investing underwent significant expansion during the era of ultra-loose monetary policy, the sudden shift towards higher interest rates could potentially expose flawed assumptions. Additionally, the industry is witnessing a shift away from traditional infrastructure businesses towards unconventional areas like laundry services, posing unexpected risks. While BlackRock may benefit from increased fees, there is a possibility that investors might question the value they receive in the long run.

BlackRock, headquartered in New York with $10 trillion in assets, aims to shape the next chapter of infrastructure, but the narrative begins outside the United States. Established transportation operators like Spain's Ferrovial and Italy's Mundys trace their roots back to the 1950s when they were engaged in building roads and railways. From the 1990s onwards, investors began acquiring these assets through competitive auction processes, with Macquarie in Australia being a prominent player.

The mid-2000s saw the emergence of independent infrastructure funds like GIP, DIF Capital Partners, and Actis. Infrastructure assets under management reached an estimated $1.1 trillion in 2023, growing at a compound rate of 16% since 2010. The major players in the field include Macquarie, Brookfield Asset Management, and, following the GIP acquisition, BlackRock.

The most successful infrastructure assets exhibit monopoly-like characteristics and contractual protections ensuring stable returns. Despite occasional setbacks, investors generally experience a smooth ride, with infrastructure being the only alternative asset class that did not record a single negative quarter of returns post the initial pandemic shock, according to MSCI data.

However, the landscape has shifted with the rise in interest rates, posing challenges for heavily leveraged infrastructure. Inflation decline and rising yields on safe assets like U.S. Treasury bonds are raising the bar for infrastructure returns. The inflexibility of "core" infrastructure assets, coupled with a 43% year-over-year decline in infrastructure fundraising in 2023, has led to a valuation discount for listed infrastructure companies.

BlackRock's move into infrastructure aligns with Fink's vision of addressing governments' investment needs, especially in the realm of independent, low-carbon energy. McKinsey estimates a $3.5 trillion annual increase in global energy spending is required to achieve net-zero emissions. While green energy offers operational opportunities, BlackRock's previous acquisitions in the infrastructure space did not significantly contribute to organic growth.

In conclusion, BlackRock's acquisition of Global Infrastructure Partners signifies a strategic move in the evolving landscape of infrastructure investing. However, the industry faces challenges, including a changing economic environment and a broadening definition of infrastructure assets. The success of this endeavor will require adept navigation and strategic execution in a dynamic market.