With its stock price at more than $400 per share, many would consider BlackRock (NYSE: BLK) stock to be expensive. Remember, though, that a $2-per-share stock can be overvalued and likely to fall, while a $1,000 stock can be undervalued and likely to grow.
BlackRock, with a market value recently topping $67 billion, is a major money manager, and the rise of exchange-traded funds is largely responsible for its success. As the company behind the popular iShares line of ETFs, BlackRock has reaped huge rewards from investors’ move toward passive investing solutions. The relatively modest management fees that BlackRock collects from its funds are enough to generate a lot of revenue, and the suitability of ETFs as long-term investments has most of those revenues recurring year after year.
BlackRock doesn’t necessarily look like the perfect value stock, with its price-to-earnings ratio near 20. But the ETF revolution shows few signs of stopping. Total global ETF assets under management recently topped the $3 trillion mark, and iShares continues to draw a substantial share of assets coming into the market. BlackRock’s primary risk is that a bear market will dampen investor confidence. That’s likely to happen at some point, as it has in the past, but battered markets have always recovered and gone on to reach new highs. In the meantime, patient investors can collect a dividend that recently yielded 2.4 percent.
Ask the Fool
Q: I’m thinking of paying off my mortgage with money from my IRA. Should I? – B.C., Greensburg, Pennsylvania
A: Think twice about it. With a traditional IRA, if you’re younger than 59 1/2, withdrawals will be taxed at your ordinary income tax rate, and you’ll face a 10 percent early withdrawal fee, too. In addition, the amount you withdraw will boost your taxable income, potentially moving you into a higher tax bracket. Meanwhile, by wiping out your mortgage debt, you’ll lose your mortgage interest tax deductions.
Think also of your mortgage interest rate, and compare it to the growth rate you expect for your IRA holdings. If your mortgage rate is 5 percent, paying any of it off early essentially “earns” you 5 percent. If you think you would have earned 5 percent with your IRA investments, you’re not coming out ahead. Cashing out a retirement account also means that money won’t be able to grow for you over time (tax-free, in the case of a Roth IRA).
Do the math for your particular situation, but consider keeping your IRA and trying to make extra payments on your mortgage when you can. Just a few extra payments each year can shave years off the loan and save you many thousands of dollars in interest payments.
Q: Where can I look up the cost of living in various cities? – D.Z., Spokane, Washington
A: There are lots of handy calculators online, and you can find a bunch by Googling “cost of living.” Some are more detailed than others, breaking out categories such as housing, food, transportation, utilities and health care. Remember that some expense categories will be more of a factor for some folks than others.
My dumbest investment
I made my dumbest mistake in the early 1980s. I bought some stock in Braniff – which had the hottest flight attendants I’d ever seen – and lost the modest amount I invested. I’ve bought exactly one airline stock since then, American Airlines, when it was in bankruptcy. I made some quick money and got the heck out. – W.D., online
The Fool responds: Here’s hoping you weren’t making your investment decisions based on the attractiveness of the company’s employees. Airlines can seem like great investments, but it’s a very challenging industry, and gobs of airlines have gone out of business. Often, when they file for bankruptcy protection, their stock investors end up with shares worth little or nothing – so don’t think of bankruptcy as a promising time for a stock.
Airlines have to deal with volatile fuel prices, very complicated scheduling logistics, unpredictable weather, fare wars, labor unions, the cost of empty seats on flights, expensive equipment and much more. A few companies, such as Southwest Airlines, have managed to be profitable over many years, but it’s a tough business in which to establish and maintain durable competitive advantages.
Warren Buffett has made some money in airline stocks, but he has also quipped, “… if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”