The Weekly Scan February 7, 2022

Welcome to the Weekly Scan. Here’s what we’re following for the week of February 7, 2022.

Dirty thirty. The nation’s total debt reached a record $30 trillion in February. Increased federal spending to combat the economic fallout of the Covid-19 pandemic is thought to have contributed to reaching the milestone years earlier than anticipated. The U.S. has spent roughly $5 trillion to expand jobless benefits, support small businesses, and provide direct stimulus payments to people throughout the pandemic. In addition to record debt, the U.S. has seen the highest inflation rate since the 1980s, due in part to Federal Reserve monetary policy that has kept interest rates low. Higher inflation has led the Federal Reserve (the Fed) to reverse course, saying that it plans on raising interest rates several times in 2022. 

• The takeaway: The high level of debt isn’t necessarily a problem, because the economy continues to expand, interest rates are low, and people are still buying Treasury securities, say some analysts interviewed by the New York Times. Nevertheless, the country’s whopping debt has caused some friction among legislators, with Senator Joe Manchin (D-WV) citing the high debt as a reason he opposes President Biden’s $2 trillion safety net and climate bill. 

New York Times

WarnerMedia: the spin-off series. AT&T announced February  that it plans to spin off its  WarnerMedia unit and combine it with Discovery, cutting dividends to investors in half. The deal will give AT&T shareholders 0.24 shares in the new company, which will be called Warner Brothers Discovery. The company plans to reduce per-share dividends to approximately $1.11 from its current $2.08. The total cost of dividend payments for AT&T is expected to fall to $8 billion annually, from $15 billion in 2021. AT&T has historically offered one of the highest dividend yields, 8.52% as of February 1, 2022. Verizon, for example, had a 4.81% dividend yield on the same day. 

• The takeaway: In May 2021, AT&T announced it would merge its WarnerMedia unit with Discovery Inc. in a cash and debt deal reportedly worth $43 billion.The combined companies reportedly would have been bigger than either Netflix and NBCUniversal. WarnerMedia includes networks such as HBO, CNN, TNT, and TBS. AT&T initially acquired WarnerMedia in 2018 for $80 billion, saddling the company with massive debt. The company has reportedly struggled to maintain investor confidence following the deal, with AT&T’s value dropping by one-third since the merger. (The S&P 500, meanwhile, has doubled in value since then.) The arrangement will reportedly also help AT&T shed some of the debt it took on because of the acquisition. 

Wall Street Journal

Splitting up isn’t hard to do. Google parent company Alphabet announced that it will conduct a 20-for-1 stock split. The goal of a stock split is to lower the company’s stock price and make it more affordable for retail investors. In this case, Alphabet will turn each class A share into 20 shares. Based on February’s closing price, Alphabet’s price-per-share would fall to roughly $138 per share after the split, from $2,752.88 per share. Alphabet’s share price hasn’t been that low since 2005. 

• The takeaway: Another motivation for the split, in addition to affordability, could be the Alphabet’’s desire to join the Dow Jones Industrial Average (DJIA), according to Bloomberg.The Dow uses a weighted system, basing entry on share price rather than market capitalization, as other indexes do. And Alphabet’s share price has been too high for the Dow. Stock splits reportedly have become less popular with companies over the years. In 2019, only two companies conducted stock splits, compared to 47 companies in 2006 and 2007. In 2020, Apple and Tesla performed 4-for-1 and 5-for-1 stock splits, respectively.

Bloomberg

More bucks for Bucks. Starbucks said last week that it plans to raise prices again, after hiking them in January, and in October 2021. The coffee chain cited inflation and labor costs as reasons for the price increases. Prices for consumer goods have risen across the U.S., with the Consumer Price Index (CPI), a key indicator of inflation, increasing 7% in the fourth quarter of 2021, the biggest spike since 1981. Meanwhile, Starbucks has expanded wages for workers to attract employees amid a labor shortage. In October 2021, Starbucks said that it would start paying baristas at least $15 per hour, and most hourly workers an average of $17 by the summer. 

• The takeaway: So far, Starbucks hasn’t taken a hit for increasing customer costs. For the three months ending January 12, 2022, Stabucks sales surged 13% globally and 18% in North America at locations that had been open for at least 13 months. Earnings per share, however, fell short of predictions, at $0.69 per share. Other food chains, such as Little Caesars, Chipotle, and McDonald’s have also increased their prices recently. Costs at all U.S. restaurants ticked up 6% in 2021.  

CNN

 Here’s what we covered last week in the Scan: 

• The cost of employee wages and salaries increased at an annualized 4% rate in the fourth quarter of 2021. 
• Bitcoin, the world’s biggest cryptocurrency fell more than 12% on January 21, 2022, dropping below $36,000 to its lowest price since July 2021.
• For the first time ever, taxes generated from cannabis sales surpassed those generated by alcohol sales in Massachusetts.
• Neil Young sent a letter to Spotify last week demanding that it remove his library of music as long as it plans to keep content that spreads vaccine misinformation on the platform.
• In 2021, the number of unprovoked shark bites worldwide increased to 73, returning to levels seen before the Covid-19 pandemic.