The Federal Open Market Committee (FOMC) wrapped up its meetings on Wednesday. Overall, little was expected to come out of this meeting, and for the most part, little did. However, there were a few items that were worth noting. First, the FOMC acknowledged the economy weakened in the first quarter, but also stated they believe it was temporary and due to weather-related factors. Also, the FOMC removed any hint of guidance regarding interest rate hikes, whereas in their last meeting they stated they would not raise rates in April. This seems to be the FOMC trying not to paint themselves into a corner, as it leaves open the possibility of interest rate hikes at any time.
Ben Bernanke joins Pimco:
In September of last year, Pimco’s co-founder Bill Gross left his helm at the bond giant to join Janus Capital Group. This exit generated a flurry of cash outflows from Pimco as investors worried that the loss of Gross would lead to inferior results. Since Gross’ departure, Pimco, who manages nearly $1.6 trillion assets, has seen $123 billion in net withdrawals. Now just over half a year later, the former Federal Reserve chairman, Ben Bernanke, is joining Pimco as a senior adviser. His experience and expertise should be an excellent resource for the asset manager. Other high profile hires by Pimco in the past include former Fed Chair Alan Greenspan, who worked with Pimco from 2007 – 2011.
Of the 360 companies in the S&P 500 that have reported earnings thus far, 71% have reported earnings above the mean estimate and 46% have reported sales above the mean estimate. A few highlights from this week include:
Apple (AAPL) kicked off the week by reporting massive profits on better than expected sales in China. Earnings Per Share (EPS) rose 33% over last year to $2.33, ahead of the average analyst estimate of $2.16. Profits were led by a large increase in iPhone sales, which were up 40% over last year. In total, 61.2 million iPhones were sold in the first quarter, much higher than the average analyst estimate of 58.1 million. Many of these phones were sold in emerging market countries, including China, where there was a 72% increase in sales over last year. Apple also announced a dividend increase and a share repurchase program to return $200 billion to shareholders by March 2017. Dividend Per Share will increase 11% to $0.52 per quarter while share repurchases will increase by $50 billion, to $140 billion. Despite these increases, Apple’s cash pile continues to grow. The company now has $193.5 billion in cash. To put this in perspective, only 15 companies listed on the S&P 500 have a market capitalization (the value of all their outstanding shares) higher than this. Analysts will keep a close eye on Apple Watch sales, which began shipping Friday. With the expectation of lower margins than most other Apple products, the Watch is not expected to deliver a major earnings impact for at least a few quarters.
Exxon Mobil (XOM) reported a smaller drop in earnings than anticipated as the oil giant’s diversified portfolio provided resilience in what has been a tough environment for energy companies. Exxon’s integrated model reduces the amount of impact that lower oil prices will have on them, unlike the exploration and production (E&P) companies. First quarter profit beat by approximately 40 percent as they reported $1.17 per share, compared to expectations of $0.83. Revenue came in at $67.6 billion, beating expectations of $56.3 billion. To compare, earnings were $2.10 per share on revenue of $106.7 billion from the same quarter a year ago. The company announced an increase in its second quarter dividend of 6 percent to $0.73 per share.
Ford Motor Company (F) missed first quarter expectations, earning $0.23 per share, short of the average analyst estimate of $0.26 per share. The miss was attributed to a higher than expected tax rate and the changeover to the new F-150. Ford’s tax rate for the quarter was 34%, much higher than the 29% rate analysts had expected. F-150 deliveries were off 40% from last year due to factory conversions needed to make the all-aluminum body F-150s. Ford estimated this shortage cost them approximately $1 billion in operating profits for the quarter. However, the company noted the factories should be at full capacity by the second quarter. Sales in China rose 9.4% in the first quarter, surpassing Hyundai Motor’s pace for the first time. Ford began selling Lincoln’s in China late last year. The company also opened its fourth factory last month, with plans to purchase and then upgrade another factory. Demand for trucks and SUVs has been increasing due to lower gas prices, meanwhile smaller car sales are decreasing. So much so that Ford is planning to lay off 700 workers at a plant in Michigan that makes compact cars and hybrids.
Gilead Sciences (GILD) reported Thursday that net profit nearly doubled from the same quarter last year. Net income of $4.3 billion was reported ($2.76 per share) compared to $2.2 billion ($1.33 per share) from Q1 2014. Sales rose 52 percent to $7.4 billion with $4.5 billion being generated from Hepatitis C drugs Sovaldi and Harvoni. Sales expectations for these two drugs were $3.5 billion. The company also raised their outlook for 2015 sales to a range of $28 billion to $29 billion, up from estimate the previous estimate of $26 billion to $27 billion. Total cash reserves now stand at over $14 billion.
Social Security Strategy for Individuals:
One of the biggest decisions regarding Social Security is when to begin collecting benefits. There are a number of strategies and approaches that can be utilized for married couples, including when to start collecting for one spouse and delaying benefits for another. It’s easily assumed that the only decision a single individual has to make is what age to take benefits. A feature that is often forgotten about is the option for an individual to “file and suspend” their benefits. This could be a very useful insurance option for an individual who does not have a spouse or a beneficiary that is relying on receiving their benefits.
A common concern among many retirees is whether they will outlive their money. By delaying collection of Social Security benefits until age 70, your annual benefit increases by approx. 8% (plus cost of living adjustments). This increased benefit is a nice feature for those who can afford to wait to collect. But what happens if you get to age 70 and discover that your life expectancy is substantially shortened? It takes nearly 13 years of collecting the higher payout until you “break-even” with the total amount of benefits you would have received if you started collecting at the full retirement age.
Due to this, it may make sense for an individual to file and suspend when you reach your full retirement age. By doing so, you continue to defer collection of your benefits until a later date, and this allows the benefit amount to grow. However, because you filed and suspended receipt of your benefits, you are able to request a payout of all deferred payments since the suspension date in a lump-sum. Your future monthly benefits would then be based on the benefits amount at full retirement age (or the age when you suspended). This option acts as an insurance against poor health or sudden cash flow needs, whereas simply waiting until age 70 to collect your benefit does not. By electing to not file and suspend, the amount you could receive if you suddenly started collection after full retirement age is a maximum of six months of benefits.
This option may make sense for many individuals who do not have a spouse or children to worry about leaving benefits for – but there are other items to consider for married couples or those with young children, so be sure to talk to your advisor on what makes sense for your particular situation.