Latest news with #Salesforce
Globe and Mail
7 hours ago
- Business
- Globe and Mail
Salesforce's (CRM) $8Bn Informatica Acquisition Shakes Up AI Race
The market response to Salesforce's (CRM) recent $8 billion acquisition of Informatica is mixed. This move marks Salesforce's latest effort to strengthen its AI capabilities, particularly within its Agentforce platform. However, the company has faced criticism over past large acquisitions, like Slack, that didn't fully meet expectations. Reflecting this cautious sentiment, the stock's reaction to the announcement has been lukewarm at best. Confident Investing Starts Here: All in all, there are upsides and downsides to deals this size, leaving me cautiously optimistic on Salesforce's most recent splurge. Salesforce's Acquisition Strategy Under the Microscope For those unfamiliar, Salesforce is a leader in customer relationship management (CRM) software. The company has a track record of high-profile acquisitions, including Tableau for $15.7 billion in 2019, MuleSoft for $6.5 billion, and Own Company for $1.9 billion in 2024. In 2023, activist investors criticized Salesforce's aggressive acquisition strategy, urging the company to focus more on profitability and scale back on large deals. Since then, Salesforce has moderated its M&A activity, now targeting only acquisitions that align closely with its strategic goals. An Unlikely Match Made in AI Heaven Salesforce's acquisition of Informatica was initially unexpected, especially after the deal collapsed in April 2024 when the price was pegged at $11 billion. However, the two parties eventually reached an agreement, leading to the current deal. This acquisition comes as Salesforce's growth has slowed, shifting from years of double-digit gains to more modest single-digit increases. Informatica is widely regarded as a leader in AI-powered enterprise cloud data management, serving over 5,000 clients across numerous countries. This acquisition should help Salesforce strengthen its AI capabilities, particularly in automating and improving data preparation, quality, and governance. Salesforce is no stranger to AI—its Agentforce platform uses generative AI to create autonomous agents that handle complex tasks such as coaching sales reps and automating quoting processes without human involvement. Integration Challenges and Potential Pitfalls Make no mistake, this acquisition also has a clear financial motive: to reignite growth, a common playbook for large tech companies facing slowing organic expansion. However, this approach doesn't always yield the desired results. Informatica was a substantial company on its own, and merging two large organizations is a complex, time-consuming process that can take years. Consider Salesforce's previous integration challenges, like with Slack's ambitious 'Digital HQ' vision. Additionally, Informatica's appeal partly stemmed from its neutrality—it was platform-agnostic across various multi-cloud and multi-vendor environments. Customers might resist if Informatica is perceived merely as a gateway into the Salesforce ecosystem. Cultural clashes are another potential hurdle, something Salesforce knows well from past experiences. Salesforce Boosts Cash Firepower One thing is certain: Salesforce has plenty of cash to deploy. The company generated $13.1 billion in operating cash flow in fiscal year 2025 and projects $14.5 billion for fiscal year 2026. As the following chart shows, Salesforce has clearly made cash generation a top priority in recent years. Is Salesforce a Buy, Sell, or Hold? On Wall Street, CRM sports a Moderate Buy consensus rating based on 27 Buy, eight Hold, and two Sell ratings in the past three months. CRM's average price target of $349.09 implies an upside potential of 26.5%. Following Salesforce's Informatica acquisition, Bank of America Securities analyst Bradley Sills issued a Buy rating on CRM with a price target of $350. He believes the reasonably priced deal will enhance Salesforce's data capabilities. Regarding near-term financial implications, the analyst believes 'the acquisition is anticipated to be accretive to Salesforce's non-GAAP operating margin and free cash flow starting in the second year post-closing.' However, not everyone on Wall Street is as confident in the deal as Sills. DA Davidson expressed caution, noting 'Informatica's suboptimal execution track record and legacy technology offerings.' Cautious Optimism for Salesforce's Future The market's cautious reaction to Salesforce's latest acquisition is understandable, but a closer look shows the deal makes strong strategic and financial sense. The Informatica purchase accelerates Salesforce's AI capabilities and strengthens its position against other tech giants. It's also expected to improve operating margins and enhance growth prospects. That said, there are key challenges to monitor in the coming years. Salesforce must successfully integrate Informatica while preserving its reputation as a platform-agnostic data provider. Additionally, blending the two companies' cultures will be crucial to sustaining innovation, a reality often overlooked by investors but vital in business. While relying on M&A to drive growth isn't always ideal, it's sometimes necessary. To borrow a baseball analogy, Salesforce may look great 'on paper,' but we won't truly know how this deal plays out until the team has spent some time 'on the field.'
Entrepreneur
8 hours ago
- Business
- Entrepreneur
How Much Do Salesforce Employees Make? Median Salaries
Salesforce's first-quarter earnings report on Wednesday beat estimates, with revenue up 8% year-over-year to $9.83 billion. Earlier this week, the company also announced a deal to buy data management company Informatica for $8 billion, its biggest acquisition since it purchased Slack for $27.1 billion in 2021. "Sometimes you have a quarter when everything is going right for you," said Salesforce CEO and Board Chair Marc Benioff, 60, in an earnings call on Wednesday, per The Wall Street Journal. According to Salesforce's 2025 proxy statement, released in April, Benioff made over $55 million in the 2025 fiscal year, which ran from Feb. 1, 2024, to Jan. 31, 2025. His base salary was $1.55 million, and his bonus was $2,500, both unchanged from 2024. His stock awards increased by about $8 million, and his option awards by over $3 million from 2024. His $55 million compensation included over $4 million in personal security costs and over half a million dollars in aircraft usage. Meanwhile, Salesforce's median employee took home a total compensation of $178,949 in fiscal year 2025. Benioff made approximately 308 times more than the typical Salesforce employee. Related: Salesforce Has Used AI to Reduce Personnel Costs By $50 Million This Year. Here's Which Roles Are Affected. In the 2024 fiscal year, Salesforce's median employee received a salary of $164,985. That year, Benioff made $39.6 million, or 240 times more than the median. Salesforce CEO Marc Benioff. Photographer: Chris Ratcliffe/Bloomberg via Getty Images Salesforce's median salary is lower than Google, where a mid-level employee made $331,894 in 2024, and Nvidia, where a typical employee made $301,233. Meanwhile, Salesforce could be slowing down hiring in certain departments and accelerating hiring in others as it attempts to internally maximize its use of AI tools. The company's chief financial and operations officer, Robin Washington, said on a call with analysts on Wednesday that Salesforce has downsized "some" of its hiring needs thanks to AI. It's also hiring fewer customer service representatives and software engineers as its current staff use AI for greater productivity, but is growing its sales team by 22% this year. Related: Here's How Much 8 CEOs Made in 2024, From JPMorgan's Jamie Dimon to Disney's Bob Iger CEO Pay Is Rising A study released on Thursday by the Associated Press found that CEO pay increased by nearly 10% in 2024 due to higher profits and stock prices. The study, which was based on proxy statements filed with federal regulators by companies in the S&P 500, examined the pay of 344 executives. It found that the median pay package of CEOs in 2024 was $17.1 million, up from $16.3 million in 2023. The highest-earning CEO on the list was Patrick W. Smith, the CEO of taser-making company Axon, who took home $164.5 million. Other top-earning executives included General Electric's H. Lawrence Culp, Jr. ($87.4 million), Apple's Tim Cook ($74.6 million), and Netflix's Theodore A. Sarandos ($61.9 million). Most of those pay packages were comprised of stock or options awards. The study also found that the typical employee at an S&P 500 company earned $85,419 in 2024, a 1.7% year-over-year increase.
Globe and Mail
11 hours ago
- Business
- Globe and Mail
Citi Keeps Their Hold Rating on Salesforce (CRM)
In a report released today, Tyler Radke from Citi maintained a Hold rating on Salesforce (CRM – Research Report), with a price target of $295.00. The company's shares opened today at $263.59. Confident Investing Starts Here: Easily unpack a company's performance with TipRanks' new KPI Data for smart investment decisions Receive undervalued, market resilient stocks right to your inbox with TipRanks' Smart Value Newsletter According to TipRanks, Radke is a 4-star analyst with an average return of 6.4% and a 52.80% success rate. Radke covers the Technology sector, focusing on stocks such as Microsoft, Adobe, and Autodesk. The word on The Street in general, suggests a Moderate Buy analyst consensus rating for Salesforce with a $352.26 average price target, which is a 33.64% upside from current levels. In a report released today, Wells Fargo also maintained a Hold rating on the stock with a $275.00 price target. The company has a one-year high of $369.00 and a one-year low of $212.00. Currently, Salesforce has an average volume of 6.76M. Based on the recent corporate insider activity of 230 insiders, corporate insider sentiment is negative on the stock. This means that over the past quarter there has been an increase of insiders selling their shares of CRM in relation to earlier this year. Last month, Srinivas Tallapragada, the Chief Eng of CRM sold 9,742.00 shares for a total of $2,467,648.60.
Yahoo
14 hours ago
- Business
- Yahoo
Salesforce (CRM) Just Crushed Earnings – So Why Is This Analyst Still Bearish?
We recently published a list of . In this article, we are going to take a look at where Salesforce, Inc. (NYSE:CRM) stands against other AI stocks on Wall Street's radar. On May 29, DA Davidson analyst Gil Luria raised the price target on Salesforce, Inc. (NYSE:CRM) to $225.00 (from $200.00) and maintained an 'Underperform' rating. Salesforce is a cloud-based CRM company that has gained popularity after it unveiled its AI-powered platform called Agentforce. The firm's rating update follows Salesforce's recent earnings report, demonstrating better-than-anticipated results. It reported first-quarter revenue of $9.83 billion, up 8% year-over-year and topping the analyst consensus from Visible Alpha. Meanwhile, adjusted net income was $2.5 billion, or $2.58 per share, rising from $2.41 billion, or $2.44 per share, in the year-ago quarter, also beating estimates. A customer service team in an office setting using the company's Customer 360 platform to communicate with customers. Despite the positive performance, DA Davidson has pointed out concerns about the company's future growth prospects. The firm noted how Salesforce's future outlook has been adjusted to account for foreign exchange impacts and a modest first-quarter beat. It also said that growth in Salesforce's core cloud segments is slowing. However, it is being partially offset by positive developments in sectors such as data cloud and artificial intelligence. Salesforce's committed remaining performance obligations (cRPO) growth was also discussed, which was one percentage point higher than anticipated. Nevertheless, guidance for the second quarter was slightly below expectations, suggesting that the company may experience single-digit constant currency (CC) growth for the first time in its history. Overall, the firm has increased the price target on the stock, but its underperform rating signifies the firm's reservations regarding its stock performance relative to the market. Overall, CRM ranks 3rd on our list of AI stocks on Wall Street's radar. While we acknowledge the potential of CRM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an AI stock that is more promising than CRM and that has 100x upside potential, check out our report about this cheapest AI stock. READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires. Disclosure: None. This article is originally published at Insider Monkey. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
14 hours ago
- Business
- Yahoo
Why Does Salesforce Want to Buy Informatica? (Hint: It Involves AI)
In this podcast, Motley Fool analyst Tim Beyers and host Ricky Mulvey discuss: A record Memorial Day weekend for the box office. Salesforce's announced acquisition of Informatica. Why investors may be underrating the growth of 5G. Then, Motley Fool personal finance expert Robert Brokamp joins Ricky for a look at annuities and how they actually work. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Before you buy stock in Salesforce, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Salesforce wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $638,985!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $853,108!* Now, it's worth noting Stock Advisor's total average return is 978% — a market-crushing outperformance compared to 171% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of May 19, 2025 This podcast was recorded on May 27, 2025. Ricky Mulvey: What's the world ignoring that maybe it shouldn't? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Tim Beyers. Tim, are we getting on a caffeine day or a no caffeine day? Tim Beyers: Today is a caffeine day. Fully caffeinated, ready to go. Ricky Mulvey: How was your Memorial Day weekend? Tim Beyers: It was pretty good. Parades, end of season, European football, FA Cup winners, Crystal Palace, life is good. Ricky Mulvey: Appreciate you separating American from European football. You know who else had a good weekend is movie theaters. I always said, who had a good movie, and that was weekends. We're coming back from Memorial Day. Movies, gearing up for a big summer in this past weekend was the biggest Memorial Day weekend for box offices ever breaking the record held in 2013. In 2013, 306 million in domestic box office. This year, 325 million, you can thank the releases of Lilo & Stitch, the non-animated version and Mission: Impossible- The Final Reckoning. Are we buying the narrative that movie theaters are coming back? Tim Beyers: Are they coming back? I guess, in a way, they are, but I also think there's a qualifier here. This might be more proof that known franchises, Ricky, still the formula, studios used to get patrons into the theater. Lilo & Stitch, known franchise. Mission: Impossible, known franchise. Final Destination Bloodlines, another one that did really well, not this weekend, but leading into the big year we're having so far. Known franchise. But it's a good thing to have theaters filling up. I do think that I should give theaters some credit that the more elevated theater experience, I think is, it's better going to the theater than it used to be. Some food to delivered to your seat, maybe some premium drinks, that's a good thing. I have to say, I did some research on this, Ricky. Do you know how many Alamo Drafthouse theaters were opened in 2024? Ricky Mulvey: I have an outline, so I'm going to say I don't know. I would not have been able to guess. I'm a big fan of Alamo Drafthouse. I got the movie pass. Tim Beyers: Seven theaters. Thank you for not cheating because it is right here in our notes. But that's pretty good. Forty-one overall, and for those who don't know, this is a private company founded in Texas. It has spread slowly throughout the country, and they deliver this in seat premium experience. They make it an event, which is pretty cool. Now, if things keep going the way they're going, we will end up with 7.8 billion in gross domestic receipts for the full year. That's still going to be lower than 2024. But for an industry that I thought, along with the rest of a lot of everybody else, that theaters were starting to die, I think the narrative is that they are most definitely not. Maybe they aren't what they were, but they ain't going away. Ricky Mulvey: We are seeing some originals come back. Tim Robinson and Paul Rudd had a movie I saw called Friendship, and it was a packed theater for an original comedy, and it was absolutely phenomenal. I think what's happening, Tim, is that we're coming into balance in the streaming theater era. Streaming didn't totally kill theaters, and probably the theater business will never return to what it was pre COVID, but there are green shoots showing that this is a real business. Tim Beyers: Well, to be fair, and I should admit my bias here. I am totally sucked in by Cobra Kai, so I'm not even thinking about movies right now. Let's be fair about this. Ricky Mulvey: Let's move on to this Salesforce acquisition. Salesforce agreeing to buy Informatica for about $8 billion. This is an acquisition that Salesforce has wanted for a while. Informatica, and you'll be able to explain this better than I understand. They help companies with data management, particularly in the Cloud. As we look at this acquisition, the real business of what we're discussing on today's show, why does Salesforce/ Marc Benioff want to spend billions on a data management company? Tim Beyers: Because Salesforce is better when you have data to do things with, that's the whole point of Salesforce. Salesforce as a customer relationship management business is you collect a bunch of data about your customers, about deals that are in the pipeline, and then you do stuff with that data that helps you do more business. Data is at the heart of what Salesforce does. You would like to have as much data as possible residing into or connected to Salesforce as humanly possible. The connected to is the point that matters here for why Informatica is important. You may remember, a few years ago, Salesforce acquired a company called MuleSoft. It was another rule breakers pick. We had it like on the scorecard for, I think a grand I'm not even sure if it was three months, Ricky. We had it on the rule breakers scorecard, and Salesforce came in and said, we'll take that, please, and gave us a double in the space of about two months, which is it's great and terrible when that happens because we loved the business, but Salesforce took it out from right underneath us. What MuleSoft did is also a little bit of data management. It's really more like managing APIs. You have a bunch of different connections into other applications, other data sources. MuleSoft helps you manage that. Informatica is different than that, but related. What Informatica used to do is tooling for what was called ETL integration. E, extract, T, transform, L, load. In other words, meaning that if you're going to take data from one place and put it in another place, you need to extract it, you need to transform it into the destination format, and then you need to load it to the destination. Informatica can still do that, but they do more things. They do more things that are related to discovering data, in your environment, what that data is, what format it is in which it exists, and then finding ways to connect to it. So MuleSoft and Informatica both are in the business of getting data, connecting it into a system, and making it available so that you could do more things with it and that's very good for Salesforce. They want that. In fact, if you have more data sources and more ability to do things with data, guess what? You can make more of Ricky, you can have more AI agents. Ricky Mulvey: One way to think about this acquisition is that Salesforce is getting more raw material to feed its AI agent with this multibillion-dollar acquisition of Informatica. Tim Beyers: That's a way to think about it. Technically, there's more under the hood, but for the purpose of this discussion, that's a perfectly good way to think about it. Ricky Mulvey: Right now, shareholders of Salesforce are feeling pretty mad about this acquisition. How about you? Are you bullish, bearish, maybe somewhere in between? Tim Beyers: I like it. There's two things I really love about the deal. It's all cash. God, I love that it's all cash. I cannot stress enough how much I like that. I wrote about this in an analyst insight for the site, because that's what Salesforce used to do. It was almost always all cash. Then they would give away equity to the employees of the acquired company, and that was always something that they'd get slammed for from some institutional investors, but at least you saw the purpose. They would buy the company, they'd buy it out outright, a smaller deal in cash, good for shareholders. Then they preserved the equity to buy out the founders, to buy out the employees were coming over. Because what they wanted them to feel was like, if you're coming here, you are going to be treated like royalty. They would create better than average loyalty among the companies that they were acquiring. They'd stay for a much longer period of time because why wouldn't you? You're getting a sweet deal. I love that we're going back to those roots. I also love that we're talking about a deal at eight billion, Ricky, that is much cheaper than when it was originally rumored, which was north of 10 billion. The story of Salesforce getting more efficient, not overspending a drunken sailor, I think that's still intact. That makes me happy. Ricky Mulvey: Salesforce is a $266 billion company. An $8-10 billion acquisition, this is large, but it's not more than half the company, if you will. I think you look back on some of the Salesforce acquisitions, the one most listeners would know is Slack, which Salesforce acquired in 2020 for about $28 billion, Tableau in 2019 for about 16 billion, the previously mentioned MuleSoft back in 2018 for 6.5 billion. When investors look at an acquisition, sometimes they worry about dewarsification, a company getting away from its core mission or spending too much on another company's growth to bring it into the fold, and as I mentioned, Salesforce shareholders are brushing off this acquisition. But Benioff has done this before. I guess, looking back at his history and Salesforce's history of acquiring companies, what grade would you give him as an acquirer? Tim Beyers: I would have given him an A prior to Slack because most of the acquisitions were all cash, and they tend to be accretive. In other words, were they were adding value over time, and the longer employees from the acquired company stayed, the more value they created. Slack really changed that. Slack was a big equity acquisition. There was some cash, but they also laid out a bunch of Salesforce equity. It broke the model a bit and I think we still don't know the complete fallout from that acquisition, so a B. But this one, like I said, I really want to give them credit. It makes some amount of strategic sense. We're going to have to wait to find out how much. But it's getting back to the roots because I cannot stress this enough, Ricky. It's an all cash deal. Thank God, it's an all cash deal. We're not using Salesforce equity. They have 14 billion on their balance sheet right now. They can't afford this. They generate plenty of organic cash flow as it is. It's better than what it was. I like seeing sales force get back to the way they used to do it, which actually paid off reasonably well. Ricky Mulvey: As we wrap up, I have a question that I'm going to ask listeners, if you have an answer for this question, I'd like you to email us at podcasts@ That is podcasts with an s @ Here's the setup. I was listening to a comedy and news, I'll say, podcast this past weekend with Tim Dillon. He was telling a story that I think is relevant to an investing audience, which is that he was talking about how Comedy Central and media executives were really brushing off both podcasting and YouTube a few years ago. This is at a time when Comedy Central was pretty dominant. They were feeling themselves. People were going to cable television to watch comedy. They owned it through the odds. They thought that this audience for comedy on cable television would always be there. To the detriment, they ignored YouTube and podcasting. Yes, the Daily Show is on YouTube, but Comedy Central was pretty late to the party, and they didn't own the comedy section of YouTube, like one may imagine for such a dominant player. It's a transition. Tim Beyers: They seeded the ground to Funny or Die, didn't they? Ricky Mulvey: I think that was a little longer ago than YouTube. I haven't heard about Funny or Die in a minute, Tim, but I'd have to look that up. [laughs] But basically, a few years later, some executives come back and they're like, We're at Comedy Central and we're really focused on podcasting starting now. They're late to that party. They're late to the YouTube party when audiences have already been built there. The broader investing question from this is what's being ignored today that you won't be able to ignore in five years, that maybe executives will start leaning into this a little bit too late. If you've got an idea, podcasts@ but we'll go with Tim Beyers first. Tim Beyers: I think the world has largely forgotten, and I'm talking about the business world that we have put fiber and wireless broadband in a growing number of places across the country and the globe. It's been idle or at least more idle than it should be for a while, Ricky. It's not going to stay that way, because we've also put sensors into just about everything, and we're going to have more robotics coming online everywhere. The hype around the Internet of Things, it was too early, it was too extreme, and consequently, it was easy to ignore. But the actual buildout of the Industrial Internet of Things is starting to move at a fairly brisk pace. I will point you to companies like John Deere, for example, Today, they're in the minority. That is not going to be the case in the future here. Smart executives are already thinking about how to leverage this for cost savings and things like logistics, distribution across industries, test and safety. There's a lot that can be done here. There are companies that are getting into this that are worthy investments. One, I'll point out for members of Motley Fool rule breakers, it's been a winner on our scorecard. Not a huge winner yet, but still am very much bullish on it, is Samsara. Credit to Jason Moser, who was earlier on that, and their ticker is, not surprisingly, IoT. Internet of Things, Ricky. Don't sleep on it. Ricky Mulvey: I like it. I might put self driving in there. I think as we get closer. Tim Beyers: I think it's related. Ricky Mulvey: I keep seeing these examples of self driving getting closer and closer to this place where it's going to be everywhere. I think that that switching point may happen within the next five years, and there's going to be a lot of big questions that come from that, especially with professional drivers. Do I need to own a car, which I like owning a car, but if you're in a city, I think that that's going to be even more of a question mark. Definitely something that I've got my eye on. Anyway, Tim Beyers, appreciate you being here. Thank you for your time and insight. Tim Beyers: Thanks, Ricky. Ricky Mulvey: Up next, Robert Brokamp joins me to discuss the ins and outs of a financial product that brought in more revenue than Apple last year. We talk about how annuities actually work. This is a family show, so we try to avoid words that are potentially offensive but Bro, let's bend the rules a little bit. Today, we're talking about annuities. It's a word that conjures very strong opinions, both pro and con, especially from financial advisors, but there's no question they play a role in many Americans retirement plans. According to industry group LIMRA, total annuity sales in 2024 were $432 billion. That's an all time high and up 12% over the previous year. For some context, Apple's 12 month trailing revenue is $400 billion. More annuity sales than Apple revenue over the past 12 months. There's an old saying that annuities are sold, not bought. In other words, most investors don't go looking for annuities, but they end up finding them. That's because they're promoted by insurance agents and financial advisors, thanks in part to the commissions that they can earn. We're going to talk about this a lot of a two part series, the pros, the cons, and one type that Bro thinks that most retirees should at least consider. How about that soft language? Bro. Robert Brokamp: This will be just an overview, a primer. Annuities are a really complex topic. We can do several shows on this, but this is just an overview, say, maybe planting the seeds of knowledge, and then you could do your own research. But I'll just start by saying here's the basic idea of annuities. You're paying an insurance company to bear some of the risk of investing and or creating income in retirement. Just as you do with any other insurance, you're just deciding which risk am I going to hold onto and which am I going to transfer to the insurance company. Depending on the annuity, there also might be some tax advantages which will dig into a bit. Again, it's just a question of which risk am I willing to bear? What am I willing to pay someone else to take? Is that price I'm paying worth the amount of risk that is getting transferred to the insurance company? Ricky Mulvey: There are many types of annuities, but we're going to break them into two broad categories. In the next episode, that's when the retirees, that's when you can really tune in. But for this episode, this is for folks who are still saving for retirement. Bro, for those working, what's so interesting about annuities? Robert Brokamp: Well, first of all, I'll point out the tax advantages, depending on the type you buy. For some of them, you can almost think of them like a non-deductible traditional IRA. You don't get a deduction when you put the money in, but the growth is tax deferred. You don't pay taxes on any capital gains, dividends, or interest along the way, leaves more money for it to grow, and then the withdrawals are taxed as ordinary income. In many cases, withdrawals before age 59.5 are also penalized 10%, just like an IRA. Also, there are some additional creditor protections with IRAs. It depends on the annuity and the state. But that's why you'll see higher risk professions like doctors, they often have a little bit more interest in annuities. Then from there, the benefits of an annuity really depend on what the annuity is invested in. Ricky Mulvey: Which type of annuity would I be looking for if I'm interested in something for the safer side of my portfolio? Robert Brokamp: Well, there you might be interested in it just saying in something like a fixed annuity or a multi year guaranteed annuity. These are basically playing interest rate, and they're often higher than what you'd get from CDs. From what I can see online, you can find multi year guaranteed annuities paying between 5.5-6% for 5-7 years. Plus, you get the tax deferral if you're buying the right type of annuity. That's great. You're getting little bit higher interest, plus you don't have to pay taxes on that interest until the contract comes due. That sounds great. On the other hand, these are not FDIC insured, just like a CD would be, and they're not liquid. You generally have to agree to keep the money invested for a certain amount of time. You'll pay surrender charges if you cash it in before that time. Many, if not most offer some penalty free withdrawals of a certain percentage of the contract value each year, but you should know the details before committing to the contract. Ricky Mulvey: Let's move to the other side. What types of annuities offer exposure to the stock market? Why should someone consider that rather than just logging into their brokerage account and buying some shares of individual companies or low cost exchange-traded funds? Robert Brokamp: Here, I think, probably the most appealing thing is the tax benefits. Let's talk about just a plain old what we call a variable annuity. It's like a 401(k). Again, you don't get a deduction when you invest the money, but the money grows tax deferred, and you get to choose from among a collection of mutual funds, though they're usually called sub accounts when they're within an annuity. I actually sold some of these back in my financial advisor days in situations where you had people who had already maxed out their 401(k)s and their IRAs. They had many years ahead of them to accumulate money. They were worried about taxes. It could make sense. Plus, often they will come with other benefits such as a death benefit that guarantees that your heirs will get a certain amount. Also, you can add riders that guarantee that you'll have a certain amount by retirement. These are called a guaranteed minimum accumulation benefits, and they will often cost, an extra 0.5-1% a year. Just know that the more you layer on these guarantees, the more restrictions that may be on what you can invest in. Another type that might be interesting to people who are accumulating money and maybe even in retirement already as well are equity index or registered index linked annuities. These provide some of the potential upside of the stock market but with a guaranteed level of return or limited downside. You might have an equity index annuity. It says, you're going to get a guaranteed two or 3% a year. But if the stock market goes up, you could earn as much as 7% a year. Or you might have these registered index linked annuities where they say if the market goes up, you can earn as much as 8-10% a year, but if the market goes down, you won't lose any money. The thing about these is you just have to understand how the return is calculated. There's usually a cap, so it could be capped at, say, again, eight, 10%, maybe as high as 15%. In years where the stock market returned over 20%, like 2023 and 2024, you missed out on some of that. Plus, the dividends are usually not factored into the return. On the other hand, though, you have the downside. 2022, when the stock market was down almost 20%, depending on the annuity, you either didn't lose any money or if you accepted a higher cap, you probably had to say, well, I'll lose as much as five or 10%, but no more than that. You may wonder how do annuities do this? Well, they do it because they're using options. The money that you give to the insurance company, it's mostly going to be invested in bonds. But then they will buy options to give you some upside by using call options, or if they're protecting on the downside, they might sell some put options. Because you're not really invested in the stock market, the dividends are not factored in the return either. It's really important to understand how the return on these are going to be calculated. Ricky Mulvey: Most of what you said about annuities make them sound pretty good, pretty appealing. As we wrap up on this portion of the conversation, what are the downsides that listeners need to know? Robert Brokamp: I would start with just the complexity. If this were a show about the benefits of investing in an S&P 500 index fund, you could easily then take what we said, go to any broker and buy any index fund from iShares or Vanguard and be done with it. Annuities are totally different. Each one is different, who sells them is going to be different. It's not easy to just go and buy one on your own. You usually have to go through an insurance agent, and the disclosures and all that stuff can run to 100-200 pages long. They're very complex. The other big downside is just the costs. I think most financial advisors, not all, but most financial advisors would say, yes, I love the benefits, but when you factor in the costs, they're probably not worth it. You absolutely need to understand if any returns projections on the annuity that you're shown are those before or after costs. You want to get that very clear. That said, I do think it's important to realize that some of these costs are going to pay for insurance, and that is backing any of the guarantees that come with the annuity. This is the way insurance works. Let's talk about homeowner's insurance. You pay for it every year, but you hope you don't need it. But you know it's there in case something catastrophic happens so that you don't have to bear all those costs. It's the same with a lot of what is offered by annuity. For example, I mentioned the guaranteed minimum accumulation benefit. Historically, the stock market always recovers, always goes up. Yes, it drops, sometime it takes five years to recover, sometimes 10 years, but it always goes up. But what if it doesn't? Or what if it takes longer than the amount of time you have to wait it out? By paying for a guaranteed minimum accumulation benefit, you're transferring some of that risk to the insurance company. You need to think about those fees like you would any other type of insurance. Is it worth the cost or can I manage the risk in some other way? If you're at all curious by this, I would say start by seeing what's available through financial services firms you already work with. Many discount brokers and mutual fund companies offer some annuities. Then if you work with a financial planner, I'm sure she or he has opinions about whether an annuity might be right for you. Ricky Mulvey: I know the guaranteed minimum accumulation benefit has Rick Engdahl's ears perked up. He's ready to hear more. Rick, hold on. That's annuities for people who are still working. Next week, we'll talk about annuities for those who are in retirement. Thanks, Bro. As always, people on the program may have interests in the stocks they talk about in the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements are sponsored content, provided for informational purpose only to see our full advertising disclosure, please check out our show notes. I'm Ricky Mulvey, thanks for listening. We'll be back tomorrow. Ricky Mulvey has no position in any of the stocks mentioned. Robert Brokamp has positions in Salesforce. Tim Beyers has positions in Apple and Salesforce. The Motley Fool has positions in and recommends Apple, Deere & Company , and Salesforce. The Motley Fool recommends Samsara. The Motley Fool has a disclosure policy. Why Does Salesforce Want to Buy Informatica? (Hint: It Involves AI) was originally published by The Motley Fool
