Inheritance Bust: Bye Baby Bums, Hello Shots for Fido
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bulls and sundry economic optimists keep scanning the horizon for signs of sustained economic recovery. Hark, there is a light in the distance. They point out, for example, that builder D.R. Horton’s (NYSE: DHI) second fiscal quarter earnings increased 46% from the period a year ago. The homebuilding part of that was up 28%. However, that light could soon start flickering because of the inheritance bust. Most industries and all generations would be affected. Among the losers could be housing, furniture, and diapers. The big winners could include products and services for animal companions.
Some Baby Boomers and even members of Generation X have already been clobbered by this reality: Part of or all of the money which was supposed to be left to them wasn’t, won’t be, or won’t total as much as they had expected. In a growing number of situations, they themselves have been dipping into their own assets to assist aging parents or relatives. Meanwhile, too many members of Generation Y – jobless, underemployed, or being paid peanuts – are witnessing the financial struggle of their parents. They wonder who will wind up supporting who. Forget waiting for a windfall. For those who haven’t personally experienced that financial shock, THE WALL STREET JOURNAL is among the financial media grimly presenting the facts.
In essence, there are three causes for the inheritance bust. One is increased longevity, often accompanied by incapacity requiring pricey accommodations. The second is the loss of value of some investments during the financial crash of 2008. Too many haven’t bounced back. The third is a shift in attitudes among the aging. According to a Merrill Lynch survey, only 41% of those with investable assets of $250,000 or more care about preserving wealth in order to pass it on. Remember that once-provocative bumper sticker: We are spending our children’s inheritance. It’s now morphing into the meme of current times.
What is playing out is that assets often have to be sold to pay maintenance for the aging. At the top of the list is usually the house. That means more housing inventory could potentially hit the market which can further impede the housing recovery. There’s another piece to this. With less or no money being passed down and with the economy still sluggish, the odds are against the young having large families or even any children. That in itself can depress demand for building the Dream House.
According to the CDC, the birth rate was down 3% last year. The USDA calcuates that a baby born in 2011 costs about $234,000 to rear, a 3.5% increase from 2010. Eventually D.R. Horton as well as other builders could feel the impact of that as potential parents just say "no" to having a family, which can reduce the incentive to buy that classic single family house with the yard and white picket fence.
The ripple effect on other industries could be brutal. A classic example could be furniture. Take, at the higher end, Ethan Allen Interiors (NYSE: ETH). Currently, as Motley Fool analyst Seth Jayson points out, its margins are very good (gross 53.3%, operating 6.6%, and net 6.9%). But demand could eventually decline. If Generation Y continues to lack the confidence to set up its own residences, even if they are rentals, furniture retailers at the low end could also suffer. For example, consider Pier 1 Imports (NYSE: PIR). That's frequently the first stop, along with Goodwill and the family garage, for furnishing early post-college. Target (NYSE: TGT) has also been getting into the home furnishings game. Both cater to youthful tastes. While their prices aren't bargain basement, they can be absorbed by those who do have some income. With no job and little hope of inheritance, there is no income.
Not only would big ticket items be impacted by fading great expectations of an eventual windfall and therefore a possible birth bust, but the mundane products like brandname diapers would also face pressure. Procter & Gamble (NYSE: PG), for example, could be selling fewer Pampers. That will worsen the current challenge of fending off generics such as the Target private label. P&G might have the initial edge of often supplying hospitals with Pampers and bonding with new mothers and their babies’ bottoms. However Mommy Bloggers quickly enough share information about not only the discounts involved with generics but also the perceived higher quality
On the other hand, the good times might continue to roll for the rapidly growing pet industry. Perhaps it's no coincidence that, as there is less money around and reduced hope of a big chunk falling into one's lap, dogs and cats have morphed into family members. Their "pet parents" (fading is the term "owner") are increasingly willing to skip a fast food casual dining meal for themselves at Panera in order to serve Fido and Muffy the brands they love. That's been making PetSmart (NASDAQ: PETM) look like a growth investment. Recently, it was at 66.56, within a 52 week range of 37.76 to 67.73. Like its competitors such as Petco, it is expanding beyond products to services which are higher margin. They include well-care such as routine examinations and vaccinations.
The companies which could be affected the most negatively by this perfect storm of shrinking and vanishing inheritances are those favored by small individual investors. They think P&G, not Apple. As we know, they aren’t at all a satisfied bunch right now. Even the safe haven they had found in mutual funds, for example, has been looking less safe. For the week of June 6, Investment Company Institute reports that $1.37 billion were yanked from long term mutual funds. Wells Fargo (NYSE: WFC) is among the financial institutions which specialize in this niche. Its high-profile offering is the Advantage Fund. Given the reduced focus on preserving wealth for the next generation, even more of the business may dry up. As the generations which didn’t inherit wealth have little or nothing to invest, that impact on retail brokerage and other individual investment services could be significant.
There are other kinds of happier scenarios. They could unfold if wealth increased, more of it was invested shrewdly, and values returned about helping out the next generations. The housing industry could have a boom, furniture stores become packed, and brandname diapers return as a symbol of caring. Since animal companions are a fixture in the single family house that industry won't be hit.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, The Procter & Gamble Company, and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend PetSmart, The Procter & Gamble Company, and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.