WEBVTT - Merck, AI, Earnings, and First Republic 0:00:00.840 --> 0:00:04.000 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.080 --> 0:00:05.240 my co host Matt Miller. 0:00:05.640 --> 0:00:09.600 Every business day, we bring you interviews from CEOs, market pros, 0:00:09.720 --> 0:00:13.680 and Bloomberg experts, along with essential market moving news. 0:00:14.160 --> 0:00:17.279 Find the Bloomberg Markets Podcast on Apple Podcasts or wherever 0:00:17.360 --> 0:00:20.520 you listen to podcasts, and at Bloomberg dot com slash podcast. 0:00:21.120 --> 0:00:23.239 Let's talk to John Murphy. He does this stuff for 0:00:23.239 --> 0:00:27.000 a living. He's Bloomberg Intelligence analysts. He's based in London. 0:00:27.280 --> 0:00:29.639 He's trying to help poor Sam Fazelli, you know, with 0:00:29.720 --> 0:00:32.479 his research. We appreciate John joining the team a few 0:00:32.560 --> 0:00:35.960 years ago. John, talk to us about Prometheus. Here, what 0:00:36.360 --> 0:00:39.120 is MERK buying for ten point eight billion dollars? 0:00:39.640 --> 0:00:43.160 Yeah, sure, nice to join you. Yeah, what are they buying. 0:00:43.200 --> 0:00:46.120 They're essentially buying one product, and it's a bit of 0:00:46.159 --> 0:00:48.600 a gamble, some people might might suggest. But what we've 0:00:48.640 --> 0:00:52.040 seen is we've seen phase two data in two indications 0:00:52.080 --> 0:00:56.600 that both ritable bow disease indications Crone's disease and ultrative colitis. 0:00:57.200 --> 0:00:59.760 Those data look very interesting, they look very competitive for 0:00:59.840 --> 0:01:03.360 an see viewpoint. If and this is the key thing, 0:01:03.760 --> 0:01:06.319 if they were to repeat those data in phase three. 0:01:06.520 --> 0:01:08.119 Were probably not going to see that data till mid 0:01:08.160 --> 0:01:11.759 twenty twenty five. And assuming there's a good safety profile, 0:01:12.040 --> 0:01:14.479 then you're going to start seeing analysts put multi billion 0:01:14.480 --> 0:01:17.000 dollar numbers in there in their spreadsheets. You're going to 0:01:17.080 --> 0:01:20.440 start seeing high single digit billion dollars in their spreadsheets, 0:01:20.440 --> 0:01:23.280 on which basis, ten point eight billion dollars will look 0:01:23.319 --> 0:01:26.560 like a great, great deal. The converse is clearly true here. 0:01:27.040 --> 0:01:29.560 Hey, John, just give me kind of the broad strokes. 0:01:29.560 --> 0:01:33.959 How does a biotech analyst value a company like Prometheus? 0:01:33.959 --> 0:01:36.520 I mean, before you know, like your close Friday with 0:01:36.560 --> 0:01:39.760 an equity value a little over five billion dollars, do 0:01:39.840 --> 0:01:41.440 you guys just go out there and say, hey, I 0:01:41.480 --> 0:01:45.039 think the size of the market potentially is this, and 0:01:45.120 --> 0:01:47.840 I think this drug could get X percent of this market, 0:01:47.880 --> 0:01:49.680 and therefore I sign a multiple that way? 0:01:49.760 --> 0:01:50.840 I mean, how do you guys do that? 0:01:51.560 --> 0:01:51.760 Yeah? 0:01:51.800 --> 0:01:53.280 I mean I think early on, a lot of this 0:01:53.400 --> 0:01:55.240 is finger and the air stuff, right, and early on, 0:01:55.280 --> 0:01:57.880 you're you're looking at the management team, you're looking at 0:01:57.880 --> 0:01:59.960 the mechanism action, and you look at the disease air 0:02:00.600 --> 0:02:02.920 Later on, and this is where these guys are now. 0:02:03.000 --> 0:02:05.520 Later on you're looking at the clinical data and you're 0:02:05.520 --> 0:02:08.560 comparing it with other products out there in the marketplace. 0:02:08.639 --> 0:02:10.440 So we know in IBD there's a lot of big 0:02:10.520 --> 0:02:13.160 drugs out there, Humera right nor to twenty billion dollars 0:02:13.160 --> 0:02:16.480 for example. So you look at the data and you 0:02:16.560 --> 0:02:20.040 compare and contrast there and versus those products. At the moment, 0:02:20.320 --> 0:02:23.160 this looks pretty competitive. So that's kind of where you 0:02:23.200 --> 0:02:25.880 are now. The next step then, of course, is a 0:02:25.919 --> 0:02:27.959 company like Prometheus is going to be able to get out, 0:02:28.080 --> 0:02:29.960 going to be able to do the Phase three itself, 0:02:29.960 --> 0:02:32.200 it's going to be able to market the drug. Now 0:02:32.200 --> 0:02:34.280 they've got a big guy on board putting their arm around, 0:02:34.280 --> 0:02:36.720 and they've got Merk on board, and so again people 0:02:36.760 --> 0:02:40.120 are going to start allocating greater value to the products 0:02:40.120 --> 0:02:41.480 and to the company on the back of that. 0:02:41.880 --> 0:02:44.680 Well, can we talk about the Merk side of this 0:02:44.760 --> 0:02:47.560 deal here, because we're coming off I think a couple 0:02:47.600 --> 0:02:50.240 of months ago Pfizer and Ciegen was the big biotech 0:02:50.280 --> 0:02:52.680 deal that everyone was talking about. From when it comes 0:02:52.680 --> 0:02:56.080 from Merks perspective, this is not probably going to be 0:02:56.160 --> 0:02:58.519 the last acquisition that they make. How much cash do 0:02:58.600 --> 0:03:00.440 they have on their balery. How much root do they 0:03:00.440 --> 0:03:03.560 have to work with to diversify their pipeline. 0:03:03.600 --> 0:03:06.920 Right, that's a great question, that's absolutely spot on In 0:03:07.000 --> 0:03:09.240 terms of the commentary, I think, first for context here, 0:03:09.280 --> 0:03:11.520 the key thing is Mert this year is going to 0:03:11.520 --> 0:03:14.320 have the world's biggest selling drug, key Truder, a cancer 0:03:14.360 --> 0:03:17.280 drug that goes off patent in twenty twenty eight when 0:03:17.280 --> 0:03:19.880 it's going to be selling thirty three billion dollars. It's 0:03:19.880 --> 0:03:23.040 about forty four percent of merk sales. So if MERK 0:03:23.120 --> 0:03:25.880 doesn't have some products to replace that, it's going to 0:03:25.919 --> 0:03:27.959 have a massive hole in its earnings. So we saw, 0:03:28.000 --> 0:03:30.320 for example, MERK did a deal with acce on spent 0:03:30.400 --> 0:03:33.960 eleven half billion dollars in twenty twenty one. You'll remember 0:03:34.000 --> 0:03:36.160 they missed out and see gen Fires have taken siege 0:03:36.200 --> 0:03:38.520 and now we've seen Prometheus today. There are going to 0:03:38.520 --> 0:03:41.640 be more deals to follow from Merk because their strategy 0:03:41.720 --> 0:03:44.720 or part of their strategy, is to make sure they 0:03:44.720 --> 0:03:48.440 have additional growth legs when key Truder goes off. Pattern 0:03:48.920 --> 0:03:51.440 in terms of how do they pay for these things, 0:03:51.520 --> 0:03:54.280 what goes on in the balance sheet, Merk's throwing off 0:03:54.360 --> 0:03:58.320 over twenty billion dollars of operating free cash flow annually. 0:03:58.640 --> 0:04:00.920 So these sort of deals are deals they can very 0:04:00.960 --> 0:04:03.880 straightforwardly do. They may pay cash, they may raise a 0:04:03.920 --> 0:04:05.840 bit of a debt in the marketplace, but it's not 0:04:05.880 --> 0:04:08.200 the sort of thing that's going to impact the credit 0:04:08.280 --> 0:04:09.440 rating of a company like this. 0:04:10.600 --> 0:04:13.280 John, you know what we've all been dealing with in 0:04:13.320 --> 0:04:17.000 the macro over you know, the last you know, you know, 0:04:17.040 --> 0:04:19.280 six months, maybe even more, is just a tightening of 0:04:19.360 --> 0:04:24.000 credit out there, tough to raise capital, cost of capital 0:04:24.040 --> 0:04:26.280 going higher for everybody in the marketplace. What does that 0:04:26.360 --> 0:04:29.120 mean for the biotech space? If I've got a really 0:04:29.200 --> 0:04:33.160 cool drug idea, or if I've got the science, can 0:04:33.200 --> 0:04:35.960 I go out there and raise money for the early 0:04:36.040 --> 0:04:39.000 early trials or is that a real tough go these days? 0:04:39.440 --> 0:04:42.240 It really is a tough go these days. Absolutely, and 0:04:42.279 --> 0:04:44.120 it's and it's tougher and tougher. And you can look 0:04:44.120 --> 0:04:45.720 at it from two points of view. You can say, 0:04:45.720 --> 0:04:48.479 if you're that biotech, what you really have to have, 0:04:48.640 --> 0:04:52.359 ideally is you have to have hopefully some clinical data 0:04:52.520 --> 0:04:54.000 at the very least, you have to have a very 0:04:54.000 --> 0:04:57.839 good concept and a strong management and a credible management 0:04:57.839 --> 0:05:01.400 management team in the absence of it becomes very, very tough, 0:05:01.440 --> 0:05:02.720 and that's when you look at the other side of 0:05:02.760 --> 0:05:05.080 the coin. Then big farmer starts looking down and they 0:05:05.080 --> 0:05:07.839 can start to maybe cherry pick some of these better 0:05:07.920 --> 0:05:11.000 assets because, as you rightly say, they're raising capital in 0:05:11.000 --> 0:05:13.520 this market is a real tough ask. Of course, for 0:05:13.560 --> 0:05:17.279 the farmer guys, they're so cash generative, it's something relatively 0:05:17.320 --> 0:05:18.880 straightforward for them. 0:05:19.320 --> 0:05:22.000 Well, when you're talking about just M and A activity 0:05:22.080 --> 0:05:24.679 in general here, I mean, it feels like it's always 0:05:24.720 --> 0:05:28.320 going to be in these bigger players' best interests to diversify. 0:05:28.320 --> 0:05:30.040 We're hearing it from Mark, we're hearing it from Pfizer, 0:05:30.120 --> 0:05:34.320 Maderna as well post COVID vaccine. But is the M 0:05:34.400 --> 0:05:37.640 and A activity in any way indicative of kind of 0:05:37.680 --> 0:05:40.640 the macroeconomic conditions that you're seeing or is this something 0:05:40.640 --> 0:05:42.320 that's very specific to biotech. 0:05:43.400 --> 0:05:46.080 Yeah, I don't think it relates to the macroeconomic side 0:05:46.080 --> 0:05:50.000 of things. What I focus on really is the patent cycle. 0:05:50.080 --> 0:05:52.840 Remember that drug companies are when they bring a drug 0:05:52.880 --> 0:05:55.600 to market, a drug has a twenty year pattern life, 0:05:55.800 --> 0:05:57.880 it's probably taking ten years to get to market. That 0:05:57.960 --> 0:06:00.440 means every ten years, on average, half of them business 0:06:00.800 --> 0:06:03.800 they have to regenerate or find from somewhere else. And 0:06:03.839 --> 0:06:07.160 what we're seeing is between twenty twenty three and twenty 0:06:07.240 --> 0:06:11.479 thirty there's nearly four hundred billion, four hundred billion of 0:06:11.560 --> 0:06:14.359 annual sales potentially exposed to generics. So you've got a 0:06:14.360 --> 0:06:15.960 lot of these players, some of the ones you just 0:06:16.040 --> 0:06:19.040 mentioned there, you've got fiser merk of artists for example. 0:06:19.080 --> 0:06:22.400 I being very very vocal indeed about having to do deals, 0:06:23.080 --> 0:06:25.000 not huge deals, not like the ones that we saw 0:06:25.040 --> 0:06:28.240 in the late eighties where that were buying other large companies, 0:06:28.279 --> 0:06:31.599 but really deals that bring in product portfolio and late 0:06:31.640 --> 0:06:34.320 stage assets and more lock on deals. But we would 0:06:34.360 --> 0:06:36.480 expect to see a lot more deals in this kind 0:06:36.520 --> 0:06:40.159 of high single digit billion dollars going forward. But we 0:06:40.240 --> 0:06:43.520 don't think that today necessarily marks any sort of sea 0:06:43.600 --> 0:06:46.040 change at all. This is very much in keeping with 0:06:46.640 --> 0:06:49.520 the strategy the murk of an announced to the market already. 0:06:50.000 --> 0:06:52.080 Hey, John, if I'm a merch shareholder, do I care 0:06:52.160 --> 0:06:54.680 whether they come up with the next big drugs internally 0:06:54.720 --> 0:06:56.240 through their R and D or they go out and 0:06:56.240 --> 0:06:56.560 buy it. 0:06:56.600 --> 0:06:57.080 Do I care? 0:06:58.200 --> 0:07:01.279 No? Short short shop aren't, So no, I don't think so. 0:07:01.360 --> 0:07:04.400 I think some investors like to see it coming through internally, 0:07:04.440 --> 0:07:06.520 But at the end of the day, why does that matter. 0:07:07.200 --> 0:07:09.680 If you're the smartest out there in terms of accessing 0:07:09.960 --> 0:07:12.720 new technology or accessing new part line, that's as good 0:07:12.720 --> 0:07:14.040 as doing it in the house yourself. 0:07:15.040 --> 0:07:17.120 I mean it's interesting. I mean because there's Mark spending 0:07:17.120 --> 0:07:18.320 thirteen billion on our R and D. 0:07:18.640 --> 0:07:22.400 Yeah, thirty seconds, hear very quickly. What about the regulatory action. 0:07:22.440 --> 0:07:23.960 It feels like the consensus here is that this is 0:07:24.000 --> 0:07:27.480 going to have zero hurdles, So I. 0:07:27.400 --> 0:07:30.800 Think, yeah, that's a very important point. Regulator in FTC 0:07:30.880 --> 0:07:33.160 and FTC have clearly looked like they're going to be 0:07:33.400 --> 0:07:36.600 more aggressive. However, there's no obvious overlap. Pier MERK doesn't 0:07:36.640 --> 0:07:39.320 have a big presence in immunology. Slightly different to when 0:07:39.360 --> 0:07:41.400 you looked at, for example, when we looked at fires 0:07:41.400 --> 0:07:43.720 a siege and we did see some potential over that 0:07:43.880 --> 0:07:46.240 learing bladder cancer. But this looks like it ought to 0:07:46.280 --> 0:07:49.080 be clearing regulatory hurdles without any major issues. 0:07:49.360 --> 0:07:51.280 All right, John, thank you so much for joining us. Really, 0:07:51.320 --> 0:07:55.040 I really appreciate getting your insight. John Murphy, longtime pharmaceutical 0:07:55.080 --> 0:07:57.080 analyst on the street, spent a lot of time in 0:07:57.120 --> 0:08:00.000 Gold and Sachs. He joined Bloomberg Intelligence fore years ago. 0:08:00.400 --> 0:08:04.960 So they've got a top notch healthcare team at Bloomberg Intelligence, 0:08:05.200 --> 0:08:08.480 got folks in the US, in London with the Sam 0:08:08.520 --> 0:08:10.400 Fazelli and John Murphy, and a good team in Asia 0:08:10.400 --> 0:08:13.000 as well, So we got it covered all over the 0:08:13.000 --> 0:08:15.040 place from every angle on the healthcare side. John Murphy 0:08:15.040 --> 0:08:19.600 pharmaceutical anamals with Bloomberg Intelligence based in London. MRK buying 0:08:19.640 --> 0:08:24.640 Prometheus biotech company ten point eight billion dollars. Nice little 0:08:24.680 --> 0:08:26.119 trade for a Monday morning. 0:08:27.640 --> 0:08:31.520 You're listening to the team ken'shar Live program Bloomberg Markets 0:08:31.520 --> 0:08:34.640 weekdays at ten am Eastern on Bloomberg dot Com, the 0:08:34.720 --> 0:08:37.840 iHeartRadio app, and the Bloomberg Business App, or listen on 0:08:37.920 --> 0:08:40.000 demand wherever you get your podcasts. 0:08:42.200 --> 0:08:46.839 Earnings are happening. Focus turns to earnings, folks, also turns 0:08:46.840 --> 0:08:48.360 to dividends. A lot of folcus saying we need to 0:08:48.400 --> 0:08:50.680 pay more attention to dividends and focus on them going 0:08:50.679 --> 0:08:53.760 forward in this higher industrade environment. Austin Grath, founder and 0:08:53.880 --> 0:08:58.120 CIO of Opal Capital, joins us. Austin talk to us 0:08:58.120 --> 0:09:02.600 about kind of how you guys view dividends, How does 0:09:03.000 --> 0:09:05.679 that factor into your investment thesis. 0:09:07.679 --> 0:09:12.199 So we view dividends as a critical component to investor returns, 0:09:12.200 --> 0:09:15.360 and we do that for a number of reasons, but 0:09:15.640 --> 0:09:19.319 I think the biggest reason is just the dividends of contributed. 0:09:19.480 --> 0:09:22.480 You know, depending on when you look back in the past, 0:09:22.480 --> 0:09:26.720 it's contributed anywhere between kind of forty and sixty percent 0:09:26.720 --> 0:09:30.000 of returns when you look at dividends and the reinvestment 0:09:30.040 --> 0:09:33.480 of those dividends. So we think that investors that tend 0:09:33.559 --> 0:09:36.600 to look to those parts of the market will end 0:09:36.679 --> 0:09:40.400 up benefiting over time. We think the reason that that 0:09:40.559 --> 0:09:44.840 exists is is because it's the good signaling mechanism for 0:09:44.960 --> 0:09:49.520 management teams. Management teams that are willing to distribute some 0:09:49.640 --> 0:09:51.920 of their cash fload to investors in the form of 0:09:51.920 --> 0:09:56.440 dividends and grow that distribution over time tend to show 0:09:56.480 --> 0:09:59.440 that they're confident and their business going forward. And the 0:09:59.520 --> 0:10:02.280 business is that do this also happen to be a 0:10:02.360 --> 0:10:06.520 relatively high quality company. So we think it puts investors 0:10:06.559 --> 0:10:08.640 in a pretty good kind of section of the market 0:10:09.200 --> 0:10:11.400 if they focus on dividend paying companies. 0:10:12.360 --> 0:10:14.800 Talk to us a little bit about that phrase high 0:10:14.920 --> 0:10:18.400 quality company. Are we looking at it from a kind 0:10:18.400 --> 0:10:20.800 of cash perspective? How much cash do some of these 0:10:20.960 --> 0:10:22.920 companies have on their balance sheet? For example, I think 0:10:22.920 --> 0:10:25.200 in twenty twenty it was Techo was all the rage 0:10:25.280 --> 0:10:28.760 because of that liquidity option. How do you value high 0:10:28.880 --> 0:10:31.559 quality at a time when that cash is diminishing. 0:10:33.120 --> 0:10:37.280 Yeah, so high quality is kind of subjective and everyone 0:10:37.480 --> 0:10:41.240 has a different definition. Some people say high quality is 0:10:41.320 --> 0:10:44.199 just high free cashual yield, and you know that that 0:10:44.840 --> 0:10:49.640 can be true in some situations, but company pre castule 0:10:49.760 --> 0:10:52.880 yield can vary over time, and so we really look 0:10:53.000 --> 0:10:56.960 for companies that both have found balance sheet, they have 0:10:57.000 --> 0:11:01.880 the ability to generate attractive free flows through the cycle. 0:11:02.000 --> 0:11:04.760 So it's not just kind of commodities companies that have 0:11:04.880 --> 0:11:07.360 a ton of free cash flow because they're in the 0:11:07.440 --> 0:11:10.640 right part of the pricing cycles for the commodity. But 0:11:10.679 --> 0:11:13.800 we want companies that have that balance sheet strength and 0:11:13.840 --> 0:11:17.480 stability to pay a decent dividend through the cycle and 0:11:17.520 --> 0:11:20.400 also grow the dividend. And then finally it comes down 0:11:20.440 --> 0:11:24.319 to the really subjective measures is speaking with management and 0:11:24.400 --> 0:11:29.400 understanding kind of what their ability and willingness to pay 0:11:29.440 --> 0:11:32.520 dividends is so companies like some of these tech companies 0:11:32.559 --> 0:11:35.760 that have a lot of cash, they may be considered 0:11:35.840 --> 0:11:38.880 high quality, but then they end up putting that cash 0:11:38.920 --> 0:11:41.719 into a bunch of kind of moonshot projects that may 0:11:41.760 --> 0:11:45.640 not be that helpful for investors. And so we like 0:11:45.679 --> 0:11:50.200 to focus on companies who are focused on investing for 0:11:50.280 --> 0:11:54.240 the long term, but also focused on putting money towards 0:11:55.000 --> 0:11:58.120 investments that have high returns on capital and aren't just 0:11:58.280 --> 0:12:01.240 kind of kind of shooting for the moon hoping that 0:12:01.360 --> 0:12:03.760 you know, whether whatever it is, kind of flying cars 0:12:03.880 --> 0:12:07.800 or you know, space exploration or or whatever they're putting 0:12:07.840 --> 0:12:11.079 money into, hoping it turns into a proper business at 0:12:11.080 --> 0:12:11.960 some point in the future. 0:12:12.520 --> 0:12:16.520 Austin, speaking of dividends, the banks have begun reporting earnings, 0:12:16.559 --> 0:12:18.240 and you think about some of these big banks and 0:12:18.280 --> 0:12:21.280 they have did with dividend yields of three to four percent. Here, 0:12:21.280 --> 0:12:23.160 what did you see from some of the bank earnings 0:12:23.160 --> 0:12:26.960 so far? And have you changed your view towards the banks? 0:12:28.440 --> 0:12:31.520 Yeah, So the bank earnings is really interesting because it 0:12:31.600 --> 0:12:33.839 kind of highlights what we think is going to be 0:12:34.160 --> 0:12:39.400 a theme through the first quarter reporting cycle. So a 0:12:39.440 --> 0:12:42.839 lot of banks didn't really so the economy or the 0:12:42.920 --> 0:12:46.880 economic data was relatively positive for a little over two 0:12:46.960 --> 0:12:49.680 thirds of the quarter, and so when you look back 0:12:49.920 --> 0:12:53.120 at what banks are reporting, they're reporting on the first quarter, 0:12:53.160 --> 0:12:57.880 which was a relatively positive economic environment. We think most 0:12:57.920 --> 0:13:03.479 banks and most companies will actually turn in relatively acceptable 0:13:03.760 --> 0:13:07.040 reports in the first quarter. We think investors should really 0:13:07.040 --> 0:13:11.800 focus on what management teams are saying about the quarters 0:13:11.840 --> 0:13:16.160 to come, as the dislocation in the market seem to 0:13:16.200 --> 0:13:20.280 have started in March, and we think management teams will 0:13:20.280 --> 0:13:22.719 start preparing for that and start preparing investors for that 0:13:22.880 --> 0:13:25.760 with some of their commentary, and there will be kind 0:13:25.760 --> 0:13:29.480 of winners and losers. We saw JP Morgan was one 0:13:29.520 --> 0:13:33.880 of the big winners from the dislocation, and some of 0:13:33.320 --> 0:13:39.520 the smaller banks are not necessarily reporting catastrophic results, but 0:13:39.600 --> 0:13:43.600 they're alluding to less earning power going forward, and we 0:13:43.640 --> 0:13:46.679 think that the risk at current valuation levels. 0:13:47.600 --> 0:13:49.920 Can We talk a little bit about buybacks here, because 0:13:49.960 --> 0:13:52.960 it feels like a lot of companies again who are 0:13:53.000 --> 0:13:56.800 still sitting on cash and issue ins etc. That they 0:13:56.920 --> 0:14:00.800 had from twenty twenty and twenty one, are actually still 0:14:00.840 --> 0:14:05.400 buying back their stock despite talking about risks and layoffs 0:14:05.480 --> 0:14:10.560 and kind of macroeconomic gloom and doom. What happens to buybacks. 0:14:12.679 --> 0:14:16.520 It's an interesting question. Some of the biggest buyer backs 0:14:16.559 --> 0:14:20.680 of shares for the large technology companies, and they tend 0:14:20.720 --> 0:14:23.119 to buy back a lot of their shares to offset 0:14:23.920 --> 0:14:29.680 dilution associated with compensation for employees. There's actually no we 0:14:29.680 --> 0:14:33.800 could talk about the tax on buybacks. There's no tax 0:14:34.760 --> 0:14:40.560 associated with the return of the buybacks for share for 0:14:40.800 --> 0:14:45.240 management compensation. There will be a one percent tax on 0:14:45.440 --> 0:14:49.480 buybacks that actually reduced share count. It's more of a 0:14:50.960 --> 0:14:55.000 discretionary payment. So we think if if the economy really 0:14:55.080 --> 0:14:59.120 does turn south, you might see those buybacks slow down 0:14:59.280 --> 0:15:02.760 or even stop in many situations. But you do have 0:15:02.800 --> 0:15:05.440 a lot of tech companies that are kind of forced 0:15:05.600 --> 0:15:09.000 to buy back shares to make up for the dilution 0:15:09.920 --> 0:15:12.040 that will take place if they don't buy back shares 0:15:12.080 --> 0:15:14.520 just because of the way that they compensate their employees. 0:15:15.520 --> 0:15:18.160 So also when you look at a company like Apple, 0:15:18.600 --> 0:15:21.120 here's a company one hundred and sixty five billion dollars 0:15:21.120 --> 0:15:24.480 of cash on its balance sheet, annual free cash flow 0:15:24.480 --> 0:15:26.560 of about one hundred billion dollars a year for the 0:15:26.640 --> 0:15:29.640 next couple of years, yet they pay no dividend. 0:15:29.720 --> 0:15:32.080 Yes, they have a massive buyback, but no dividend. 0:15:32.560 --> 0:15:35.640 I mean, does that surprise you because it seems like 0:15:35.680 --> 0:15:37.720 they could put out a two or three percent dividend 0:15:37.800 --> 0:15:42.720 yield and attract a whole new group of income seeking investors. 0:15:43.080 --> 0:15:45.520 When you see a company like Apple, how do you 0:15:45.600 --> 0:15:46.160 kind of view that? 0:15:47.720 --> 0:15:50.640 Yeah, we look at that as management doesn't really value 0:15:51.320 --> 0:15:56.600 a dividend. They value buybacks more than dividends. Over time, 0:15:56.920 --> 0:16:01.400 we think that that might change. One of the changes 0:16:01.920 --> 0:16:05.480 we see is potentially with the buy back tax that 0:16:05.640 --> 0:16:10.400 was put in place. There has been talk about increasing that. 0:16:10.480 --> 0:16:14.040 I think that President Biden mentioned it around the State 0:16:14.080 --> 0:16:17.440 of the Union speech, to the extent that the government 0:16:17.560 --> 0:16:21.760 starts to increase buy back taxes. We think that dividends 0:16:21.760 --> 0:16:27.160 become relatively more attractive because you don't have the significant 0:16:27.560 --> 0:16:32.000 difference in tax situation between dividends and buybacks, and we 0:16:32.080 --> 0:16:36.720 think more companies will start distributing cash flows in the 0:16:36.720 --> 0:16:41.800 form of dividends going forward. One thought on the Apple situation, 0:16:41.960 --> 0:16:45.760 and actually many tech tech companies out there, is just 0:16:45.800 --> 0:16:49.880 they haven't necessarily hit a point in their life cycle 0:16:49.920 --> 0:16:54.640 where investors are expecting them to distribute that cash. We 0:16:54.680 --> 0:16:58.880 think over time, if investors pressure for a higher dividend, 0:16:59.280 --> 0:17:03.360 you will get more serious consideration for management teams. 0:17:03.560 --> 0:17:06.000 All right, Austin, thanks so much for joining us. Always 0:17:06.000 --> 0:17:10.840 love talking about stocks and dividends and companies dividend policies, 0:17:10.880 --> 0:17:13.280 because a lot of folks are saying this next decade 0:17:13.359 --> 0:17:14.840 is the decade of the dividend. 0:17:14.880 --> 0:17:15.480 We've heard that a. 0:17:15.400 --> 0:17:17.960 Couple of times from a couple investors. Austin Graff, He's 0:17:17.960 --> 0:17:21.359 a founder and CIO of Opal Capital. Before that, he 0:17:21.440 --> 0:17:22.840 was an equity analyst at PIMCO. 0:17:23.359 --> 0:17:26.480 You're listening to the tape cats are live program Bloomberg 0:17:26.560 --> 0:17:30.119 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:17:30.200 --> 0:17:33.440 tune in app, Bloomberg dot com, and the Bloomberg Business App. 0:17:33.480 --> 0:17:36.280 You can also listen live on Amazon Alexa from our 0:17:36.280 --> 0:17:41.360 flagship New York station, Just say Alexa, play Bloomberg eleven thirty. 0:17:42.680 --> 0:17:44.560 If you think about over the last year, year and 0:17:44.560 --> 0:17:47.399 a half, at least, to me, the most widely used 0:17:47.480 --> 0:17:50.960 term reference on Ernie's conference causes has been AI. Every 0:17:51.040 --> 0:17:55.720 company's talking about AI, artificial intelligence, how it's impacting their business, 0:17:55.760 --> 0:17:58.160 how they're using it, and I think most investors don't 0:17:58.160 --> 0:17:59.840 even know what it is. They're trying to figure out 0:18:00.040 --> 0:18:01.800 what is it? How does it impact the companies that 0:18:01.840 --> 0:18:04.520 I invest in. We figured we go to a professional 0:18:04.520 --> 0:18:06.920 here who does this stuff, Ashley Still. She's a senior 0:18:07.000 --> 0:18:10.520 vice president and general manager for creative Cloud and document 0:18:10.560 --> 0:18:15.320 Cloud at a little tech company out in California called Adobe. Ashley, 0:18:15.600 --> 0:18:16.960 thank you so much for joining us. 0:18:18.280 --> 0:18:19.040 Let's just start off. 0:18:19.080 --> 0:18:21.399 I would love to get your definition of what is 0:18:21.480 --> 0:18:24.359 AI and then how does it apply to some of 0:18:24.400 --> 0:18:26.120 the businesses that Adobe is in. 0:18:28.280 --> 0:18:32.400 Well, first, thanks for having me, and you know, at Adobe, 0:18:32.440 --> 0:18:35.480 our mission is to help everyone bring their CreatiVision to life, 0:18:35.480 --> 0:18:40.240 and we certainly believe that AI gives us a huge 0:18:40.240 --> 0:18:44.879 opportunity to do that, for professionals and non professionals to like. So, 0:18:45.400 --> 0:18:51.000 you know, AI simply for me, is when algorithms kind 0:18:51.000 --> 0:18:56.879 of are aiding software to do tasks, and it often 0:18:57.400 --> 0:19:05.679 helps automate repetitive, monotonous activities that traditionally humans have undertaken. 0:19:06.280 --> 0:19:08.480 And one of the areas that we're really focused on 0:19:08.600 --> 0:19:11.760 right now is an error of AI called generative AI, 0:19:12.119 --> 0:19:17.440 and that enables people, you know, it's services like chat 0:19:17.440 --> 0:19:21.800 GPT or Dolly, and Adobe just introduced a service called 0:19:21.800 --> 0:19:27.560 Adobe Firefly that enables you to simply just enter text 0:19:28.440 --> 0:19:34.160 and the models and algorithm produce images based on the 0:19:34.200 --> 0:19:38.560 text that you've written. And so obviously this enables a 0:19:38.760 --> 0:19:44.160 huge opportunity for people to express their ideas and create 0:19:44.240 --> 0:19:46.560 content in new in different ways. 0:19:47.000 --> 0:19:50.400 So how does that align with kind of just the 0:19:50.440 --> 0:19:52.679 broader text space. I guess I mean, I'm thinking of 0:19:52.720 --> 0:19:56.440 it as chat gpt is the easiest example of it. 0:19:56.560 --> 0:20:00.000 It kind of makes sense that alphabet would hop into 0:20:00.160 --> 0:20:02.000 what the Microsoft would happen to it because they have 0:20:02.040 --> 0:20:05.800 search engines and that makes it kind of an easier alignment. 0:20:05.840 --> 0:20:08.520 But then how do other companies within the tech space 0:20:09.760 --> 0:20:12.600 adopt it? It feels like AI and chash ebt even 0:20:12.680 --> 0:20:14.600 is a very wide umbrella. Can you give us some 0:20:14.600 --> 0:20:15.280 more examples? 0:20:16.680 --> 0:20:21.040 Absolutely? So, you know, for Adobe, we see this is 0:20:21.119 --> 0:20:25.000 a huge opportunity to aid editing. If you think about 0:20:25.000 --> 0:20:28.480 what our tools do, whether it's video or imaging or 0:20:28.480 --> 0:20:34.680 photography or design, our tools enable creative professionals or marketers 0:20:35.160 --> 0:20:39.960 to produce content. And they might do that with starting 0:20:40.040 --> 0:20:45.639 with images or graphics that they've created themselves, or you know, 0:20:45.640 --> 0:20:48.960 if you're a large company, you're probably licensing content as well. 0:20:49.560 --> 0:20:53.880 This is a huge opportunities another source of content. Think 0:20:53.920 --> 0:20:57.639 of it that way, where if you're in Photoshop and 0:20:58.320 --> 0:21:01.000 you need to add an element to a design that 0:21:01.040 --> 0:21:05.320 you're working on, instead of going and and you know 0:21:05.440 --> 0:21:09.000 finding it in your files or from a colleague, you 0:21:09.040 --> 0:21:12.440 can literally just produce it on the fly. So it 0:21:12.520 --> 0:21:17.359 is again a powerful tool to help with editing. On 0:21:17.440 --> 0:21:22.119 the marketing side, again, it enables marketers in more text 0:21:22.200 --> 0:21:27.520 examples to create copy and and you know, one of 0:21:27.560 --> 0:21:32.120 the big trends in digital and for companies is personalization 0:21:33.080 --> 0:21:36.600 and a lot of content and experiences are being created 0:21:37.280 --> 0:21:42.080 in order for businesses to have more relevant experiences for 0:21:42.160 --> 0:21:47.640 their customers. And humans can't produce enough content to get 0:21:47.720 --> 0:21:51.159 to true one to one personalization, and so AI is 0:21:51.200 --> 0:21:55.199 going to be a really important again tool in the 0:21:55.440 --> 0:22:00.119 in the tool chest to achieve true personalization and and 0:22:00.720 --> 0:22:02.040 unlocks the power of digital. 0:22:02.560 --> 0:22:05.480 Hey, Ashley, you know, as more and more companies and 0:22:05.520 --> 0:22:09.200 individuals for that matter, embrace artificial intelligence, there's concerns out 0:22:09.200 --> 0:22:14.800 there about control, having control over AI, what it can do. 0:22:15.720 --> 0:22:18.480 How do you guys at Adobe think about that and 0:22:18.560 --> 0:22:19.280