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    I’ve heard an interesting theory several times of late. This investing theory explains how the next market crash will happen. This is a bubble that went on for years and nobody suspected it. Have you ever heard how the baby boomers will withdraw so much money from the market to finance their retirement that will generate a massive bear market?

     

    The Theory about the Next Market Crash

    Here’s a little bit of rationale behind this theory: The baby boomers are the group of people that were born between 1946 and 1964. It was the most massive wave of newborns since the Great Depression:

    boomers

    These newborns also became the most powerful workforce of the past century. They have built, grown and prospered for many years. The Boomers created a real boom of wealth in the economy. They also put lots of money aside in their pension plans and retirement funds.

    But all good things come to end and soon these boomers will retire (some of them already have). Boomers are also known for their good lifestyle and once they retire, they will want to maintain it at a high level. This is why they will withdraw massive amounts from their nest egg to finance their retirement and high cost of living. Combine this situation with the current demography showing a lot less newborns each year. This means that for every boomer retiring, we have about 1/3 of a worker entering the workforce. This also means that for every boomer withdrawing funds, we have 1/3 of a worker contributing to a retirement fund (e.g. investing money). Considering the fact that most young people are more worried about buying an iPhone 6 than contributing to their retirement fund, we may even push the math to 1/4 or 1/5 of a worker investing for every boomer retiring!

    What happen when investors start to withdraw funds massively from the market? It becomes a sellers’ market or a bear market if you prefer. Companies may continue to bring in the numbers and grow their profits, if there are more people to sell their stocks than to buy them, the stock will drop accordingly.

     

    Is This The End of Our Bull Market?

     

    When I first heard of this theory, I was a bit skeptical. I mean; it all makes sense but any simplistic theory about something bad that’s going to happen is always hiding part of the truth. This is why I dug further to find out if we are really going to see more sellers than buyers in the future? Will the pension funds be forced to sell too many stocks and push the market down?

     

    The short answer is no; there will not be a bear market because of the boomers. The situation is not that bad for one reason; the huge stack of money they are sitting on in their pension plan is generating yield. This investment return will be almost enough to cover for the big wave of withdrawals:

     

     net withdrawals

    This graph is coming from Stats Can (Canadian data) but it shows how the ratio net cash flow on assets will drop slightly but not enough to create a commotion in the markets. In addition to this graph, I would also add that boomers better be careful with their withdrawal rates as they are retiring early (in their 60’s) and will possibly live for a good 20-25 years. Therefore, if they start selling too much right away, they won’t have enough money saved aside and will out live their savings…

     

    Then again, just another simplistic theory down the drain because of some gurus trying to scare you. You can keep investing, boomers won’t bust our markets!

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    Let’s put it this way, while the US stock market is on a super bullish ride, McDonald’s has struggled with a flat return for the past two years. In fact, it’s a blessing the stock pays dividends because otherwise it would have been better to put your money in a money market fund if you only look at the stock appreciation since September 2012!

    MCD

     

    What is Happening with Mickey D?

    The optimist will tell you that:

    MCD is the leader in the fast food industry,

    It dominates with its incredible locations and their Real Estate is key in their business model,

    It dominates the breakfast and drive-through business (where a big chunk of its profits originate),

    A dividend yield over 3.4% is more than enough to be paid to wait.

     

    The pessimist will tell you that:

    Labor costs may increase as more protests arise

    Margins are under pressure due to fierce competition

    Health and Burgers don’t fit well together and the health wings are spreading right now

     

    I’m sticking to MCD right now, what about you?

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    I must be honest with you; I discovered Disney (DIS) by fluke. It wasn’t on any of my watch lists and never appeared in my filters (since I prefer a dividend yield over 2.50%). I took a look at Disney solely because I wanted to analyze two other related kids’ entertainment companies: Hasbro (HAS) and Mattel (MAT). Those two companies represented great buys aopportunities back in 2012 but I never thought I would end up buying the low yield dividend stock used only for comparison purposes.

     

    Low Dividend Yield – High Investment Return

     

    Disney is not exactly comparable to Hasbro and Mattel since the first is more in the entertaining business with ESPN and their theme park division but all three businesses target the same market: kids and their parents. I wasn’t too excited to add Disney after my first analysis but I thought it would be interesting to compare a low yield stock compared to two strong companies with respectable dividend yields (over 3% at that time).

     

    I was reluctant to add a low dividend yield stock to my portfolio. After all, buying dividend stocks is all about receiving dividend payouts, right? I know many dividend investors who ignore stocks paying 1% in dividend yield. But on May 2013, I decided to buy 45 shares of DIS and I ignored MAT and HAS:

    disney

    It was definitely the best decision, but it’s easy to play Monday morning quarterback. My decision was motivated by Disney’s phenomenal fundamentals for future dividend growth. The company currently represents the perfect combination of growth: revenues, earnings and dividend payouts are following the exact same trend. This is quite a feat for any company:

    Disney2

     

    But This Was Last Year, What About Now – Did You Miss Mickey’s Boat?

     

    In my opinion, this is still the time to buy Disney. Funny enough, when I bought this stock back last year, it was at its 52 week high…  and if you buy it today (more than one year later), you will still buy it around its new 52 week high.

     

    I think that if you buy it today, you will probably have to be a little patient before showing a double digit return on your investment. The stock is trading at a 21 P/E ratio which is probably a bit high for the company at the moment. When you look at its P/E ratio history, you see Disney’s valuation a bit overpriced right now:

    disney3

     

    Mind you, it’s not the first time the stock is trading around the 20-22 mark. I don’t really mind about the relatively high price to pay for this company since the future looks bright as well. We all know they can work their magic around a character set to boost their profit and they recently bought the biggest character franchise ever created (Star Wars). Once the next Star Wars movie hits the screen; revenues will take another jump. Their recent acquisition of Maker Studios for $500M will boost their distribution channels in this segment and leverage their existing entertainment division (Lucasfilm, Animation Studios and Marvel).

     

    The US economy is going forward and the consumers’ appetite for entertainment will grow in the upcoming years. Disney is not only a leader in its industry; it has positioned its products to benefit from the next wave of spending. In my perception, Disney looks like a professional surfer ready to take on the next big wave.

     

    I believe there are several good years to come for this company, what do you think?

     

    Disclaimer: I hold shares of Disney (DIS)

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