Day: September 6, 2024

The U.S. may be home to some of the world’s biggest investors, but unlike other countries such as Saudi Arabia and Singapore, the federal government doesn’t have an investment arm of its own.

That might change if Donald Trump is elected to a second term as president. Speaking at the Economic Club of New York on Thursday, Trump called for the creation of a sovereign wealth fund—a term that describes state-owned organizations that operate like hedge funds or private equity firms, pursuing different financial strategies such as buying up stock in public companies or backing startups and other private companies.

In his remarks, Trump kept the proposal vague, saying the fund would invest in “great national endeavors for the benefit of all of the American people” and arguing that other countries have sovereign wealth funds, but “we have nothing.” He added that the government could call its investing firm something other than a “sovereign wealth fund,” which, he said, may not be “appropriate.”

A history of sovereign wealth

While Trump may be looking to other countries as inspiration for his idea, the creation of sovereign wealth funds has typically coincided with budget surpluses, often as a result of oil booms. One of the first examples was Kuwait, which created an investment authority in 1953, followed by Norway’s Norges Bank Investment Management in 1967, and the Abu Dhabi Investment Authority in 1976; all three managed surplus oil revenue.

Even the U.S. has its own homegrown fund born out of oil money, with Alaska establishing one in 1976 that has yielded an annual payout to every state citizen since 1980. In 2023, every Alaskan—including children—received $1,312.

In recent years, sovereign wealth funds—especially from Asia and the Middle East—have become major players in the tech industry. Temasek, a Singaporean investment company that counts the country’s government as the sole equity shareholder, has backed top public companies such as Microsoft and Nvidia, as well as private companies—including, disastrously, FTX. Temasek also backs other funds, including the OpenAI investor Alpha Intelligence Capital, which is closing a $250 million second fund.

Another prominent example is Saudi Arabia’s Public Investment Fund, which owns a venture arm called Sanabil. Top U.S. funds including Andreessen Horowitz, Coatue, and KKR have drawn scrutiny for receiving Saudi capital from Sanabil, especially after the assassination of journalist Jamal Khashoggi by agents of the Saudi government.

‘America First’

Without additional context from Trump, it’s unclear how the U.S. sovereign wealth fund he proposed would operate, especially without a clear source of funding—or direction for capital investments.

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Matt Bruenig, a progressive lawyer and founder of the think tank People’s Policy Project, has previously proposed a “social wealth fund for America,” about which he posted again on X after Trump’s remarks. Under Bruenig’s plan, the fund would tackle wealth inequality by issuing every American a share of ownership and accumulating assets such as stocks, bonds, and real estate. Citizens would not be permitted to sell their shares, but would earn a universal basic dividend, similar to the Alaskan model.

The sovereign wealth fund was not the only proposal from Trump in his speech on Thursday. He also announced that he would establish a “government efficiency commission” headed by Elon Musk that would be tasked with completing an audit of the government.

“I look forward to serving America if the opportunity arises,” Musk posted on X.

This story was originally featured on Fortune.com

• Nvidia stock has tumbled since it reported earnings last week.

• Bank of America says the slide opens up an attractive buying opportunity.

• The chip maker’s stock is trading near its lowest valuation in five years, the bank said.

Nvidia bulls may feel paralyzed by the sudden onslaught of headwinds blowing against the company, but to Bank of America, the move down in the stock price in the last week offers an attractive buying opportunity.

On Tuesday, shares of the semiconductor kingpin tanked, wrenching down its market value by $279 billion for the largest one-day decline in US corporate history.

The pullback came after the firm’s recent earnings report failed to meet the market’s most bullish expectations, adding to fears that the artificial intelligence rally may be losing steam.

The stock briefly continued its retreat on Wednesday, following a report that the firm received a subpoena from the Department of Justice. In all, the stock has fallen by as much as 15% since Nvidia released its second-quarter earnings in late August.

To Bank of America, the post-earnings skid marks a buying opportunity.

In a note released Thursday, the bank said that Nvidia is now hovering around its cheapest valuation in the past five years.

“While market forces could enhance near-term stock volatility, we continue to find NVDA valuation compelling at 27x CY25/FY26E consensus PE (or only ~20x PE at high-end of $5+ CY25 eps estimate),” analyst Vivek Arya wrote.

Compared to this, Nvidia price-to-earnings have ranged between the mid-20s to mid-60s over the past half-decade.

Investors who buy the stock now could be facing 54% upside, according to BofA’s price target of $165 per share.

This looks achievable, as Nvidia will remain a key beneficiary of AI investing and won’t always be pressured down by headwinds, the bank said. For instance, weak supply-side fundamentals should subside in the near term, the analysts noted.

While investors are disappointed by delays in the firm’s next-gen Blackwell chip, shipments should be confirmed over the next several weeks, BofA estimates.

In any case, the bank doesn’t anticipate demand for prior-gen Hopper chips to disappear, given how strong AI demand is.

Concerning regulatory headwinds, Nvidia has since denied receiving a subpoena from the DOJ.

Bloomberg — which first reported on the subpoena — later reported that the DOJ sent a civil investigative demand, citing a source close to the matter.

Though BofA assumes no impact from these developments, it noted that government cases are not uncommon against large US tech companies.

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Finally, skepticism about AI’s potential remains a non-issue, the bank said, at least until 2026. Those concerned that the AI spending wave has yet to show results must simply be patient, the analysts wrote.

“The tech industry will give itself at least another 1-2 years of intense buildout of NVDA Blackwell chip with its 4x lift in AI training and 25x+ lift in inference. Efforts thus far with the first wave of large language models (LLM), using NVDA Hopper was just the teaser,” BofA wrote, anticipating that real AI capabilities will be unlocked by upcoming LLMs.

Read the original article on Business Insider

The Federal Reserve has officially signaled that interest rate hikes have peaked and that interest rate cuts will begin this year. Since the start of 2022, the Federal Reserve in the United States has increased the interest rate it charges banks, which leads to increasing interest rates paid to customers for banks and savings products.

Higher interest rates make slow-growth dividend stocks less attractive, all else equal. The logic goes that if you can get the yield in a savings account, why take the risk with a dividend stock that may fall in value? This is why ultra-high-yielding tobacco stocks British American Tobacco (NYSE: BTI) and Altria Group (NYSE: MO) went nowhere for a few years. This summer, everything changed. Both stocks have soared in the past three months, crushing the returns of the broad market S&P 500 over this time.

Is it too late to buy these two high-yielding tobacco stocks? Or is the party just getting started with interest rates set to decline shortly?

Altria Group: 7.3% dividend yield in a tough customer environment

Altria Group owns the leading premium cigarette brand in the United States: Marlboro. Along with Marlboro, it owns the NJOY nicotine vaping brand, Middleton Cigars, On! nicotine pouches, and a large stake in Anheuser Busch. It currently has a 7.29% dividend yield, down from over 9% earlier this year.

Investors have concerns about declining volumes for Marlboro in the United States. To put it simply, people are smoking less and less in the country. So far this year, Marlboro shipment volumes have declined by more than 10% with no signs of slowing down. They have declined for many years. And yet, Altria’s operating income is up 51.8% in the last 10 years. Why? Because of the pricing power it is able to pass on for cigarette packs. This is a dynamic that can continue for many years.

On top of this, there are a lot of other segments that can drive earnings growth for Altria Group. Cigars are not seeing nearly as quick of a volume decline and also have pricing power. Vaping and nicotine pouches are growth markets and should replace volumes from Marlboro in the coming years. Add it all together, and I think that the concerns about Marlboro’s volume declines are overblown.

Let’s not forget the company’s repurchase program, either. Shares outstanding are down by 13.7% in the last 10 years, which makes it easier for Altria to grow its dividend per share. Free cash flow per share — the fuel for dividend payments — is up 125% in the last 10 years. As long as the company can keep raising prices and transition some consumers to new products while decreasing its share count, I think free cash flow per share can continue to grow.

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British American Tobacco: Higher yield and higher upside?

The other ultra-high dividend payer is British American Tobacco. It has some similarities and differences to Altria Group and an even higher dividend yield of 7.8%.

British American Tobacco is similar to Altria in that it has exposure to the fast-declining U.S. market. It owns brands such as Dunhill and Lucky Strike. As discussed above, the company will need to raise prices and improve its profit margin in order to keep profits up in the United States.

Unlike Altria Group, British American Tobacco has exposure to international markets. In general, these markets are seeing slower volume declines compared to the United States, which is a benefit for the company. However, it still has foreign currency risk, which can impact U.S. investors. If the U.S. dollar rises in value relative to other currencies, that can be an earnings headwind to British American Tobacco. The international segment is a mixed bag, but I think it can drive profit growth for many years as long as the U.S. dollar isn’t too strong.

British American Tobacco is doing much better than Altria in new tobacco-free nicotine products. It has strong brands like Vuse (vaping) and Velo (nicotine pouches) that are becoming a much larger part of its business. In fiscal 2023, these smokeless products were 16.5% of revenue and finally flipped from losing money to positive profitability. There is no sign that these divisions are slowing down, either. This can drive cash-flow growth and therefore maintain or grow the British American Tobacco dividend.

Is it too late to buy these dividend payers?

Depending on your tax profile (which can be important for dividend stocks), dividend stocks are great to own if they have a higher yield than a savings account or U.S. Treasury bond. This is especially true if Treasury rates are about to fall. Altria and British American Tobacco both have dividend yields above 7%, which is much higher than what you can get in a savings account.

The only question is: Are the dividend yields safe? I think they clearly are. Both companies are seeing declining volumes in the United States but can counteract these effects with price increases and more profit contributions from new divisions. This is why it shouldn’t be surprising that Altria just raised its quarterly dividend payout by 4% to $1.02.

In fact, I think that both stocks have a good chance to grow their dividend-per-share payouts at a consistent rate over the next five to 10 years. If that happens, income-focused investors will be happy to have bought shares at today’s prices.

Should you invest $1,000 in Altria Group right now?

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.

These Ultra-High Dividend Stocks Are Soaring: Is It Too Late to Buy Shares? was originally published by The Motley Fool