Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: The Ethereum Merge, Porsche’s IPO, and Dividends About this episode This week on Prof G Markets, Scott shares his thoughts on what the Merge will mean for Ethereum’s position in the crypto space and weighs in on why Volkswagen is offering shares of Porsche. Then, in a deep dive, we learn about why some companies pay dividends to their investors, and others don’t.
The Merge
Porche's IPO
Dividends
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:18 Scott Galloway? This week's number, 40. That's the percentage of people between the ages of 18 and 44 who gambled online last year. Nearly double the percentage of those aged 45 to 54. I started the most successful gambling addiction hotline in history. Every fifth caller was a winner.
1:38 Scott Galloway? That's good. That's good.
1:50 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing the Ethereum merge, Porsche's IPO, and a deep dive into dividends. We're recording from the Code Conference in Los Angeles. Here with the news is Prop G Media Analyst Ed Elson, who was at our after-party last night, bringing down the average age. What's in the news, Ed? Let's start with a review of market vitals.
2:17 Ed Elson? The S and P was relatively stable last week, as was the dollar. Bitcoin slipped a few percentage points and Ethereum gained slightly, but that's a quiet week for cryptocurrencies which are very volatile. And on Tuesday, the yield on 10-year US Treasuries hit its highest level since mid-June. And that could be a sign that investor confidence is growing. And shifting to the headlines, last week, Russia cut off the Nord Stream natural gas pipeline indefinitely. That sent European energy futures soaring and the euro to a 20-year low. And in corporate news, CineWorld, the second largest theater chain in the world, filed for Chapter 11 bankruptcy. The company is struggling with $9 billion in debt and the stock is down around 90% year-to-date.
3:03 Ed Elson? Finally, CVS is acquiring Signify Health for about $8 billion. Now, as we mentioned a couple of weeks ago, Amazon was also looking at Signify Health, but it appears they lost out. So Scott, what are your thoughts on this? You've spoken a lot about Amazon and its move into healthcare, but it seems like they're struggling now. They acquired one medical in July, but since then, they've shut down their existing healthcare unit, Amazon Care, and now they've lost this deal to CVS. So where do you think Amazon goes from here?
3:34 Scott Galloway? So they've lost the deal. Well, I don't, you know, I don't know if CVS has won here because I think Amazon are very disciplined operators. And I imagine they told their bankers, they said, okay, this is what it's worth to us and at a certain price, it's not worth it to us. At a certain price, almost every acquisition makes sense and a certain price, almost every acquisition doesn't make sense. So I sort of see this as reflecting discipline on their part because Amazon could go to 50 billion. Amazon has more capital than CVS than almost any other company. Also, a lot of times, traditional firms in the space overpay for stuff because they panic and they run out and they buy shit because they're like, okay, we're scared of
4:15 Scott Galloway? Amazon coming in, so we have to put our elbows out and we're going to pay whatever's required. So, I mean, basically what's happened here is CVS probably paid $2 or $3 billion more than they would have otherwise because they see Amazon as an existential threat.
4:30 Ed Elson? Okay, on to our main stories. On Thursday, the Ethereum blockchain will undergo a system overhaul referred to as the merge. The platform will transition to a proof-of-stake model, meaning users put up their own crypto holdings to validate transactions. And that's instead of the previous proof-of-work or mining model where users put up computing power. Now, the complexities of how this actually works are less important here. The main point is, this new system will use 99.9% less energy than the previous one. And that's a big deal, because energy efficiency has been one of crypto's biggest criticisms. The Ethereum blockchain alone uses up as much energy per year as the entire country
5:14 Ed Elson? of the Netherlands. So this should solve that problem, but it'll be difficult to pull off. One crypto expert compared it to trying to change the engines on a plane mid-flight. So Scott, I know you're a no-coiner, but if this works, would it make you feel more optimistic about crypto, not just as a technology, but also as an asset class?
5:35 Scott Galloway? Super interesting. And the thing that I've always found is the genius of Bitcoin, and to a lesser extent, Ethereum, which appears to have more utility, as that's where my understanding is, it's a platform, a lot of NFTs are created. But the genius around this is scarcity credibility, and that is, people believe that Bitcoin's going to stop mining at, I think it's 21 million coins. And this methodology of saying every time Bitcoin is mined, the energy requirements goes up, and therefore there's a limiting factor creating scarcity. Now, that limiting factor that creates that scarcity that requires energy is artificial, and it's been a real issue. As you mentioned, this is absorbing more power and has a bigger carbon footprint than many
6:20 Scott Galloway? nations. And Bitcoin, I always thought, kind of that bullshit Bitcoin maximalist. Narrative, well, it's they become the incremental purchaser of alternative energy, justifying or thereby financing alternative power. Never bought that. Bottom line is it's consuming energy that otherwise does not need to be consumed. So I think this is exciting. I don't know if it makes the asset class more viable or just takes away a negative externality of the asset class. But it's hard to imagine this isn't a good thing when you reduce your carbon footprint by 99%. Ed, do you have any thoughts?
6:52 Ed Elson? Yeah, I think from the asset class perspective, it just inspires confidence if it goes right. I mean, this seems like a very, very difficult thing to do. It's been in the works for two years. I don't know, there've just been so many failures for crypto for the past six, seven months that if this goes right, it's it just inspires optimism that actually crypto works and you can get things done in a decentralized manner. And I think investors are probably feeling that Ethereum's up 50% from its mid-June low, and that's compared to Bitcoin, which is down 5%, and the S and P, which is up 5%.
7:27 Scott Galloway? Bitcoin has traditionally been seen as a leader because it has a larger market cap and Ethereum's kind of been a distant number two, and then everything else is way, way behind. It feels as if that might be flipped, that you might see Ethereum ascend to the kind of iron throne of market capitalization. It feels as if there's a flight to, I don't even call it a flight to quality, but a flight to utility.
7:51 Ed Elson? You haven't invested in any cryptocurrencies. So do you think you ever will?
7:55 Scott Galloway? I don't think I'll ever invest in a coin. It's different for me because I'm at a stage where I want to be more risk averse. And that doesn't mean not investing in risky assets. It means being much more diversified. Taking a small number of bets with a small amount of your capital in kind of what I'll call the crazy shit that might have asymmetric upside. The problem with those types of assets is that there's two types of capital you're investing. One is your financial capital and the other is your human capital, and that is If you're buying cryptocurrency, it's typically not the kind of person or not the type of asset class that you just put in your 401k and look at in 20 years. You're checking with a price of Solana or Cum Rocket 10 times a day and it takes a lot of attention.
8:39 Scott Galloway? It also takes a human toll. And that is you think you're smart when it's going up and then you start beating yourself up when it's down. You start hating yourself. You start being really upset and being hard on yourself and that takes a toll on you. You only have a certain amount of emotional resilience to throw at disappointment and those are going to come. Everybody's going to get fired. Everyone's going to have bad things happen. And I just worry that the amount of emotional capital you want to allocate towards a volatile asset class, you need to ring fence it. One of the ways you ring fence it is you don't put more than 2% or 3% of your net worth. And if you're only worth, you know, a thousand bucks or 10,000 bucks, then you put 20 or
9:22 Scott Galloway? 30 bucks or 200 or 300 bucks into this because that way if it goes to zero, you're okay. You're not losing sleep. And generally speaking, once you get to a certain age, you don't want to invest in anything that could go to zero.
9:35 Ed Elson? All right. Well, let's move on to our second story. As we discussed last week, the IPO market's been quiet this year, but there's one that's getting a lot of attention. Volkswagen is planning to sell shares of Porsche through an IPO at a valuation between 60 and 85 billion dollars. That could be one of Europe's largest IPOs ever and it may come as soon as October. Volkswagen is selling 12 and a half percent of Porsche to the public, another 12 and a half percent to the Porsche family and the company will retain 75% ownership. So Scott, my question is, why are they doing this? If Volkswagen is still going to be the primary owner, then what's the point in IPOing Porsche?
10:18 Scott Galloway? What happens is the investors will find the shittiest asset. In this case, it's Volkswagen and they say, okay, a low growth, value-based global automobile company trades at five or six times EBITDA. So they assign that multiple to the entire company. Regardless, there might be this fast-growing SaaS company within Volkswagen that they invested in, but it will not get the kind of multiple it would on its own. So why will they receive a greater multiple for Porsche as an independent company than stuck inside of Volkswagen? Because... The market for Porsche is a better market. Porsche appeals to midlife crisis wealthy guys and there are more and more of them. That is a great market.
10:59 Scott Galloway? The top 1% are killing it and the number of men who want to be more attractive to mates, that just never goes out of style. Volkswagen trades at enterprise value to EBITDA of 4, 4.1 to be exact. GM, 6.24. Ferrari, hello midlife crisis. Ferrari, get this, trades at 22.4 times EBITDA. So what are they doing? They're looking for some of that Ferrari magic EBITDA multiple by letting the Porsche brand trade on its own and giving opportunity to invest directly in the Porsche brand. They're going to take 5 billion of the capital raised and invest it in electric vehicles to try and keep up with the electrification of the automobile industry.
11:43 Scott Galloway? Porsche's stated goal is 80% of sales should be all electric by 2030. I think that'll be interesting. There's something about that throaty, unique sound of Porsche that I think is kind of central to the brand, but we'll see.
11:55 Scott Galloway? Five-year plan is they want to spend 100 billion to electrify and challenge Tesla. I think a lot of sharks are coming for Tesla. Couldn't happen to a nicer guy, Ed. But this is a smart move by Volkswagen. They're sort of liberating, if you will, Porsche from the confines of a low multiple automobile company and moving it into what I'd call more of a luxury brand. LVMH-like weight class or altitude and will trade at a much higher multiple. Good, good for Porsche, good for Volkswagen, good for the planet.
12:24 Ed Elson? So Scott, do you think Volkswagen's strategy could start a trend among other corporations? And that is using public offerings to give investors direct access to smaller, higher margin components of the business? And I'm specifically thinking here about big tech because I know that you've suggested Amazon's cloud business should be spun, but what about something like this where they remain integrated in the company but with a distinct stock?
12:49 Scott Galloway? So theoretically, yes. And the thing that should drive this or usually does drive it is the delta between the multiple on EBITDA that the combined companies are getting and what the individual stock would likely trade at. If Amazon were to flatline, if the stock were to go down and start reflecting the multiple of a traditional retailer, and you had a cloud business stuck inside, and cloud businesses continue to trade at 15, 20, 40, 50 times revenues, the pressure might become so great to liberate it because they would recognize just so much capital.
13:24 Ed Elson? After the break, we'll be back with a deep dive on dividends. See you in a bit.
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15:58 Ed Elson? We're back with ProfG Markets. The Wall Street Journal recently reported that of the 190 public companies which canceled their dividends during the pandemic, over a third have yet to start paying them out again. That includes some big names like Boeing and Disney. And it got us wondering why companies pay or don't pay dividends, and what that means for investors. For a deep dive on that subject, here's ProfG Media's editor in chief, Jason Stavers. Jason, can we start with a basic question? What is a dividend?
16:30 Speaker 03 Essentially, Ed, it's cash. It's money transferred from a corporation to its shareholders. Typically, dividends are paid out on a set schedule, something like 50 cents per share, paid every six months. For most people, the money just appears in the same brokerage account where they hold the shares. Occasionally, companies make a special dividend payment, a one-time distribution of cash or a distribution of shares, usually after an unusual event, like the sale of a subsidiary. But typically, we're talking about regularly scheduled cash payments to shareholders.
17:02 Ed Elson? That sounds great. It sounds like I want all the stocks I own to pay dividends.
17:06 Speaker 03 Well, a dividend payment is a bit of a sleight of hand. Let's say you own a share of AT&T, which pays a quarterly dividend of about 28 cents. The day before the dividend payment, that share gives you a slice of ownership of AT&T's assets, including its cash. So the next day, when the company pays you your 28 cents, it's already your money, only now you control it directly rather than through your stake in AT&T. So in simple economic terms, a dividend just moves your money from one place, the share price, to another, your cash balance. And in fact, the market understands this. And so AT&T's share price goes down 28 cents every time it pays that dividend.
17:50 Ed Elson? So if the share price is going down, is this a bad thing?
17:54 Speaker 03 Well, the good news is that now you can spend that 28 cents however you want, whereas before it was controlled by AT&T's management. And 28 cents, obviously, isn't very much, but that's over a dollar a year. And since it only costs about $17 to buy a share of AT&T, that's a 7% return on your investment, even before you account for any increase in AT&T's share price during that time. So for long-term investors who nonetheless want some liquidity, for example, if you're paying for your living expenses with your investments, dividends offers a way to do that, a steady stream of cash coming out of this fixed asset you own, the stock. But at the end of the day, as a shareholder, it's your money either way.
18:37 Ed Elson? So when we look at the data on dividends, there's a widespread, around half of all public companies pay dividends. But among the large companies in the S&P 500, that number is more than 80%. So why do some companies pay a dividend and others don't?
18:53 Speaker 03 When companies are growing, they typically have lots of productive ways they can spend money. Every dollar of profit can be invested in more advertising, a bigger factory, or hiring more people. And those investments will generate even more profits. Eventually, however, a successful company runs out of ways it can usefully spend the next dollar of profit. That doesn't mean it's stopped growing, but it's making enough profit that even once it's funded all of its growth opportunities, it still has money left over. And that's money it should probably return to shareholders through a dividend. Here's Warren Buffett, who's describing how a good management team handles excess profits.
19:34 Speaker 04 I commend managements that have a wonderful business. For utilizing cash in those wonderful businesses or in businesses that they understand and will also have wonderful economics and for getting the rest of the money back to the shareholders.
19:48 Ed Elson? So that sounds great, but how do you draw the line there? I mean, what counts as the rest of the money?
19:54 Speaker 03 So let's say I run a profitable, growing company and you're one of my shareholders. We've got strong sales in the United States and a lot of potential customers in Europe, but no presence there and no way to reach them. So at the top of our list of potential investments is hiring a European sales team. I've calculated that a million dollar investment in Europe will generate $2 million in profits. That's 100% return, so I can easily justify to you, look, Ed, this is your money, but we can get 100% return on it, which is way better than you can get with the money if we pay it out to you in dividends.
20:30 Ed Elson? Sounds fair.
20:31 Speaker 03 Great. So our first million dollars in profits is going to Europe. Now, as I work down the list of investment opportunities, the returns do get lower. So the question is, what's the level of return at which you would prefer me to just give you our remaining profits rather than continue to invest them in increasingly dubious company programs?
20:53 Ed Elson? Well, I guess it's when your rate of return falls below what I can get investing the money somewhere else.
20:59 Speaker 03 Yeah, that's exactly right. Once I, the company management, can't beat the market with the next incremental dollar of profit, it's time to start paying it out to you in the form of dividends. Now, in practice, the decision-making is a little more complicated. The return on internal investment is hard to predict and we don't necessarily have a nice, neat list of projects, but the general idea is what Warren Buffett explained. As long as we can keep putting money into the business we know and get a great return, we should do that. But the moment that our profits would be better utilized by you, our investors, we should be returning that money to you. After all, it's yours. Typically, this is a sign of company maturity. Large, stable companies with good product coverage and deep market penetration both
21:42 Speaker 03 generate more profit and have less places to put that profit to work. So they're more likely to pay dividends. Those 80% of companies in the S and P 500, they mostly fall into that category. What's also important about dividends, though, is their signaling value. Declaring a dividend is a sign of confidence that the company will continue to generate strong cash flows. Canceling a dividend, on the other hand, can spook investors. Now, when those 190 companies that you mentioned earlier suspended their dividends during the pandemic, they got a bit of a free pass, right? They were able to stop paying out cash to shareholders without so much of the concern that investors would sell their shares because it was a signal of bad times ahead.
22:26 Speaker 03 Everybody was facing bad times ahead, and we could assign that to the pandemic. Well, now it appears that a lot of these companies are using the opportunity that free pass gave them to shore up some areas in need of capital before they commit to sending out dividends again.
22:42 Ed Elson? Thanks, Jason. Scott, do you look at a company's dividend payments when you make your own investment decisions?
22:48 Scott Galloway? You know, I don't. I traditionally haven't invested in stocks that have dividends. I've been more attracted to the growthy tech stuff. A, it's an investment class I think I understand. They tend to, in my opinion, have more opportunity for upside. And dividend payers are usually companies that are more mature, that, as Jason said, has decided that they don't have a great use of capital for growth. So they return some of their capital to shareholders, using the form of stock buybacks or dividends. It's a nice predictable form of cash flow for people as they're a little bit older. But yeah, it's not something I look for. And maybe I should, but again, I'm more about wanting to invest in more growthy stocks. All right, enough of that, Ed. What's the team focused on for the coming week?
23:32 Ed Elson? We've got earnings from Oracle and Rent the Runway on Monday and then Adobe on Thursday. Friday, we'll get an update on the U.S. Consumer Sentiment Index. It's increased in the past two months, up 15% from its all-time low in June. So we'll see if that continues. Do you have any predictions?
23:49 Scott Galloway? Well, yeah, Rent the Runway, I really like the founders. It's an interesting business. It either needs to be acquired or it's going to go out of business. So it'll be interesting to see if its price cutting has started. This thing's on a downward death march. The business makes no sense. So my prediction for Rent the Runway is pain. That's all for this episode. Our producers are Claire Miller and Jason Stavert. Special thanks to Catherine Dillon and the Prop G Media team. If you like what you heard, please follow, download and subscribe. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. We will catch you next week.
24:44 Scott Galloway? So hold on, Porsche is a car, Porsche is Ellen's wife.
24:48 Ed Elson? So it's Porsche?
24:50 Scott Galloway? No, Porsche is fine.
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