Written by The Dividend Sensei (https://dividendsensei.com/)

Amazon just announced it will be raising its minimum wage to $15 for all US workers (and $12.30 to $13.59 for its 20,000 UK employees). Shares fell about 1.5% of the news, potentially due to investor concerns that higher wages would slow the company’s recent margin expansion in its bread and butter North American retail business.

However, as an Amazon shareholder myself (there are six reasons Amazon is the only non dividend stock I plan to own), I’m actually thrilled at this news. That’s because I consider it a brilliant long-term strategic move by the company that will ultimately enrich shareholders. More importantly, it also bodes well for wage and thus broader economic growth that could keep the bull market running for years to come.

Amazon Hiking US Minimum Wage To $15: What Investors Need To Know

Amazon’s higher wages go into effect on November 1st. While many US companies (like Walmart and Target) have vowed to eventually raise their minimum wages to 15 years, that’s spread out over several years. The higher wages will affect 250,000 full time US employees as well as 100,000 season employees the company is hiring ahead of the Christmas shopping season.

According to the Washington Post, warehouse pay for Amazon employees currently ranges from $12.25 in Omaha, Nebraska, to $16.50 per hour in New York City. Those making over $15 will get a $1 per hour bump as well. While bonuses and stock grants are being eliminated as part of the wage hike plan, overall worker benefits will increase. This is because employees will continue to receive Amazon’s already generous benefits package which includes:

  • Comprehensive healthcare, including medical, dental, and vision coverage
  • Company-paid life and disability insurance
  • Up to 20 weeks of paid parental leave
  • 401k matching
  • Career Choice, which pre-pays 95% of associates’ tuition for courses in high-demand fields, whether those jobs are at Amazon or another company
  • Career Skills, which trains hourly associates in critical job skills like resume writing, how to communicate effectively, and computer basics

But hiking wages for hundreds of thousands of employees will surely hurt short-term margins right? So how can I, as an Amazon shareholder, be so excited about this much higher worker pay? Because as Bezos told investors in 2017 “you have to think in four to seven year time frames”. And over the long-term Amazon’s higher pay is nothing short of a genius move that will help enrich not just its shareholders, but all US investors.

A Brilliant Long-Term Strategy That Will Make Long-Term Shareholders Rich

There are three reasons why Amazon hiking wages so aggressively is great for long-term shareholders. The first is that it effectively neutralizes rising political risks, including criticism by Bernie Sanders and his supporters that Amazon is taking advantage of workers, thus necessitating government intervention. For example, Sanders, a rising star in the Democratic Party that has an 80% chance of taking control of the House in November’s elections, recently introduced the Stop Bad Employers by Zeroing Out Subsidies (BEZOS) bill. While this bill has no chance of making it past the Senate (who GOP is still likely to control next year), or President Trump’s veto pen, it represents a greater long-term threat to Amazon and large corporations everywhere.

The BEZOS bill specifically claims that large companies like Amazon, by paying their workers wages that are too low (specifically below $15 per hour), are being subsidized by Federal anti-poverty programs like food stamps and healthcare programs. To eliminate this subsidy Sanders proposed a “100 percent tax on corporations with 500 or more employees equal to the amount of federal benefits received by their low-wage workers.” Ultimately that tax would likely be higher than merely raising wages to $15 per hour, thus Amazon is likely to save money in the long-term should the Democrats ever regain control of all three branches and pass this bill. That’s possible in 2020 or 2022, depending on the outcome of the next presidential election. But as great as Amazon sidestepping future regulatory risk is, there’s an even bigger reason for Amazon shareholders to cheer these wage hikes. That’s because warehouse wages are already rising quickly, thanks to the strong economy creating the tightest job market in 20 years.

Source:Jeff Miller

Today official (U3) unemployment is 3.9%, and the more accurate underemployment (U6) is 7.5%. Both figures are falling rapidly due to strong job creation that’s outpacing the growth rate in the labor force (about 125,000 per month). In fact, the more important U6 rate is falling about twice as fast as the official U3 unemployment rate.

Source: FOMC

What’s more, despite slower economic growth expected in the coming years, the Federal Reserve thinks U3 unemployment will fall to 3.6% in 2019 and 3.5% in 2020 and 2021. U6 will likely continue drifting lower meaning that companies will find it harder to find and retain good workers. What that means is rising wages, especially for warehouse employees that Amazon is hiring at a furious pace as it expands it North American logistics network.

In the past year warehouse wages have grown 6.7% to $13.30 per hour according to industry analyst firm Prologistix. And according to Brian Devine, president of Prologistix, within the next 12 to 18 months, even without Amazon’s wage hike, warehouse employer wages would have risen to $14.10 per hour (another 6%).

This means that Amazon was likely to have to raise wages anyway, just to remain competitive with competing firms. But by moving earlier than most in boosting earnings (even for those making over $15 per hour), Amazon will become a far more competitive firm, better able to dominate online retail as well as all its other fast growing markets. That’s because, according to Gerald Storch of the retail consulting firm Storch Advisors, “This will lead to a general increase in minimum wages in all industries…The weaker retailers have been cutting costs and squeezing every penny…They are in a very tough place.”

In an ever tightening job market, where there are more job openings than workers looking for jobs, companies have to remain competitive and attract, and retain, quality workers in order to grow. Amazon, who employs 575,000 workers globally, was already one of the most desired places to work. For instance,  Amazon was named #1 on LinkedIn’s 2018 Top Companies list, ranks #1 on The Harris Poll Corporate Reputation survey, and is  #2 in Fortune’s World’s Most Admired Companies survey. Now with even higher pay (and the same competitive benefits package), Amazon will find it even easier to attract an army of quality workers to help it grow and dominate ever more markets.

And don’t forget that Amazon has the immense size and economies of scale to be able to bear the short-term burden of higher wages far better than smaller rivals. If those rivals (like retailer Sears) end up going bankrupt, then Amazon will eat their market share. Thus it will likely be able to boost sales and actually earn more than it did when it was paying lower wages. And over the long-term thanks to its heavy investment into automating its warehouses and creating ever more productive workers, Amazon’s margins are likely to rebound from the temporary dip caused by this wage hike.

Ultimately this is why I’m enthusiastically endorsing Bezos’ long-term focused, strategic decision to jump ahead of his rivals, and make Amazon an even more competitive company. Thus I’m reiterating my “strong buy” recommendation on the stock which my conservative discounted cash flow valuation model says is worth $2,239 per share today (about 13% undervalued).  That means that over the next decade Amazon should be capable of delivering about 20% annualized total returns, making it a great long-term growth investment.

But as great as this news is for Amazon investors, it’s also wonderful news for all American workers, and investors.

Great News For Future Wage Growth, Long-Term Economic Growth, And Stocks In General

The worst financial crisis since the Great Depression, and most severe recession since WWII, has meant US wage growth has been rising at a painfully slow rate. But when we look at median wage growth, which eliminates the negative wage growth effects of 10,000 retiring baby boomers each day, we see that wage growth has been steadily rising since 2010.

Source: Atlanta Federal Reserve

And more importantly, that wage growth isn’t limited to high paying, high skilled jobs like computer programs and doctors. As we just saw, wage growth for lower skilled jobs like warehouse employees is soaring at rates not seen since the tech boom of the 1990’s (when wage growth was 4% to 6%). Rising wages, despite what many economists fear, are not a large driver of inflation, as long as productivity growth is high enough to match it. That’s because if productivity rises 3%, then wages can grow at 5%, and inflation will remain at the Fed’s long-term target of 2.0% core PCE (where it’s been sitting for four straight months). Last quarter the Bureau of Labor Statistics reported US worker productivity rose at its highest level in four years, 2.9%. This is why, despite slowly accelerating wage growth, core inflation is not spiking higher, which would force both short-term and long-term interest rates to rise (thus slowing the economy). Most importantly of all, rising wages, in addition to fueling strong consumer spending (65% to 70% of US economy), is also a key ingredient in long-term productivity growth. That’s because if wages are low, then companies have little incentive to invest in productivity boosting technology like automation. But if wages are high and rising? Well then corporations have two key reasons to spend more heavily on expanded and more efficient capacity.

The first reason is that growing demand means their current capacity is no longer sufficient to meet demand. Thus company’s need to invest in expanded capacity, say by building new, larger, and more productive factories. And because of rising wage pressure that threatens their margins, companies have large incentives to buy the latest and greatest technology that lets each worker producer more goods/services per hour. This lowers per unit production costs, and helps maintain or even grow margins.  On top of that higher paid employees means lower turnover, which is an incredibly costly things for companies. Replacing workers that quit (to move to other better paying firms), takes a lot of time, results in less efficient workers at first, and disrupts day to day operations and thus hinders growth and profitability. Corporate tax cuts, as well as the ability to instantly expense capex through the end of 2022, means that companies now have the incentive (created by stronger consumer spending), and more financial resources to invest in game changing technologies that could dramatically increase productivity and double long-term economic growth.

In fact, analyst firm McKinsey estimates that in the 2020’s (and 2030’s) new technologies such as 5G, the internet of things (IOT), and AI driven automation will allow US productivity to rise to at least 2%, but potentially 2.5% or even 3%. That, combined with America’s long-term 1% growth in our labor force (mostly due to immigration) means that for a period of 10 to 20 years, our economy might grow at 3.5% to 4.0% annually. All while potentially supporting wage growth of 4.5% to 5% while keeping core inflation at the Fed’s target of 2.0%.

What would that mean for US investors? Well strong and potentially rising profit margins, earnings, cash flows and dividends for one. It would also mean that long-term interest rates would likely stabilize at 3% to 3.5%, far below their historical norm of about 5%. That’s because long-term interest rates (10 year yield that market most cares about),  are primarily priced in the bond market on future inflation expectations. Today both the 10 and 30 year Treasury bonds are pricing in long-term core inflation of just 2.1%. This means that as long as inflation doesn’t rise above that (remember it’s currently 2.0%), then interest rates are not likely to move much higher. What do you get when you combine strong and rising wages, brisk consumer spending, a strong economy, booming corporate profits, and interest rates that remain stable at today’s levels? A continued bull market that could run for several more years, and make possible the financial dreams of tens of millions of Americans.

Bottom Line: Like Bezos Amazon Shareholders, And Investors In General, Have To Think About The Big Long-Term Picture

There is a common, but false assumption that rising wages are bad for corporate profits. Another common belief is that rising wages stock inflation, resulting in higher interest rates, and potentially recessions if rate hikes go too far. While this may be true for some firms in the short-term, ultimately higher wages help fuel stronger consumer spending, which makes up 65% to 70% of the US economy.

More importantly, rising wages, courtesy of a strong economy and ever tightening job market, induce companies like Amazon to invest in productivity boosting equipment such as robots that are now working alongside the company’s fulfillment center employees. Higher productivity is the cornerstone of long-term economic growth. That’s because it allows unit costs of goods and services to fall, thus allowing for margins to be preserved or even expanded, despite rising labor costs. In terms of Amazon’s big wage hike investors need to realize that it was a stroke of strategic genius. Not just does it neutralize the company’s long-term political risks, but it will mean that Amazon will be able to attract, and more importantly, retain, top worker talent in the tightest job market in 20 years. It will also put increased pressure on Amazon’s rivals to match its wage hikes, which many won’t be able to bear financially. Thus the comapany will enjoy potentially even higher market share and profits in the future due to these wage increases.

As Costco’s legendary high pay and great benefits have proven over the decades, happier and more productive workers, combined with lower turnover, is the key to superior customer service, wide moats, and great long-term shareholder returns. Meanwhile, Amazon’s higher pay will help induce many more companies to follow suite. That means more spending power for Main Street Americans, which will likely keep retail sales, and thus the economy in general, stronger for longer than many currently expect. That in turn, when combined with the coming productivity boom of the 2020s, could keep corporate profits and stock prices rising for many years to come. Or to put another way, Amazon’s big wage hike isn’t just great long-term news for its shareholders, but for all US investors in general.

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