<THE EVENING NEWS>
Thursday, April 1, 1999
MARKET CLOSE

DJIA            9732.51   +46.35     (+0.47%)
S&P 500         1293.72    +7.35     (+0.57%)
Nasdaq          2493.37   +31.97     (+1.30%)
Russell 2000     398.74    +1.11     (+0.28%)
30-Year Bond   93 31/32   -21/32  5.67 Yield

HEROES

Broadband networking products supplier ANTEC Corp. (Nasdaq: ANTC) advanced today after losing $5 1/8 yesterday on bearish comments about the company's first-quarter outlook by a Merrill Lynch analyst concerned that recent merger activity might hurt the company's revenue base. The shares reclaimed $3 1/4 to $24 3/4 on about three times the recent normal trading volume after ANTEC said in a statement that it is "comfortable that results for the first quarter will be within the range of current analysts' estimates." Nine analysts surveyed by First Call currently have a $0.13 consensus EPS projection. ANTEC also said the combination of the broadband division of Nortel Networks (NYSE: NT) and Arris Interactive, a joint venture between ANTEC and Nortel, has been completed. It was this project that ANTEC pointed to in December as a sign of a future earnings boost when it was trying to cool the pessimism that surrounded a Q4 earnings warning driven by sagging international sales. Specific details of the transaction, however, won't be available until a conference call ANTEC plans later this month.

Today's Internet megamerger -- the $5.7 billion stock purchase of online streaming media company broadcast.com (Nasdaq: BCST) by portal giant Yahoo! (Nasdaq: YHOO) -- sent shares of several other companies flying north today as speculation about further buyouts heated up. The look for the Internet in the near future is likely to mean significantly more multimedia, making companies like online audio and video applications developer InterVU Inc. (Nasdaq: ITVU) and streaming technologies developer RealNetworks (Nasdaq: RNWK), an October Foolish Double, potentially hot properties. That's quite believable considering that America Online (NYSE: AOL) and General Electric (NYSE: GE) division NBC were reportedly looking at broadcast.com as well. To wit, shares of InterVU grabbed $15 1/8 to $59 1/2 today while RealNetworks raced ahead $35 11/16 to $157 7/8. Today's moves by broadcast.com, up $11 13/16 to $130, and Yahoo!, up $11 3/8 to $179 3/4, were mere hiccups by comparison. More on today's deal can be found in the Lunchtime News.

QUICK TAKES: Contact lenses direct marketer 1-800 CONTACTS (Nasdaq: CTAC) cleared up $5 1/2 to $17 3/4 after the company said it expects Q1 earnings to at least breakeven because of Internet sales. Two analysts surveyed by First Call currently anticipate a $0.12 loss... Chemical mechanical planarization equipment company LAM Research (Nasdaq: LRCX) moved up $4 13/16 to $33 13/16 today, reportedly on rumors that Novellus Systems (Nasdaq: NVLS) was looking to buy the company. Novellus added $3 1/2 to $58 5/8... File servers powerhouse Network Appliance (Nasdaq: NTAP) added $5 7/8 to $56 1/2 after last night announcing plans to sell of $2.5 million shares of its common stock for $50 1/2 each... Telecom equipment maker Lucent Technologies (NYSE: LU), which split its stock 2-for-1 after the market's close today, added $3 3/4 to $111 3/4.

Consumer information and data processing company infoUSA Inc. (Nasdaq: IUSAA) added $1 3/4 to $6 after announcing a partnership to develop Internet applications with Web domain registrar Network Solutions (Nasdaq: NSOL). infoUSA's B shares (Nasdaq: IUSAB) advanced $1 3/8 to $5 7/8... Computer systems integration and maintenance services firm Unisys Corp. (NYSE: UIS) added $2 1/8 to $29 13/16 after Salomon Smith Barney upgraded the stock to "buy" from "outperform"... Analog and digital signal processing (DSP) chip maker Texas Instruments (NYSE: TXN) moved up $4 3/8 to $103 5/8 today. Last night, the company said it plans to invest between $333 and $417 million dollars over the next three years at its Miho, Japan, manufacturing site.

Recovery Engineering (Nasdaq: REIN), which sells water treatment systems under the PUR brand name, flowed up $1 5/8 to $11 after it said it expects to meet or beat Wall Street's Q1 EPS estimates; two analysts currently expect a $0.09 per share loss, according to First Call... Online software retailer Beyond.com (Nasdaq: BYND), which last night said it completed the purchase of BuyDirect.com in exchange for about $123 million in company stock, gained $7 5/8 to $33 13/16 today... Fiber optic network operator Qwest Communications (Nasdaq: QWST) added $2 13/32 to $74 1/2 after it closed on a $1 billion senior credit facility from Bank of America (NYSE: BAC)... NTL Inc. (Nasdaq: NTLI), a U.S.-based company that provides telecom and cable service in the U.K., moved ahead $2 1/8 to $83 1/2 after it said it will complete its move to holding company structure at 8:30 p.m. tonight. The restructuring was done in connection with the company's efforts to pursue opportunities outside of the U.K. and Ireland.

Blood plasma expander and replacement technologies developer BioTime Inc. (Nasdaq: BTIM) flowed ahead $1 1/2 to $17 1/2 after it said last night that the FDA has approved the company's bid to market Hextend, a blood plasma volume expander used to treat injury- or surgery-related blood loss... Marketing firm Marketing Services Group (Nasdaq: MSGI) gained $2 7/16 to $16 15/16 after it said it sold a majority interest in its Metro Fulfillment subsidiary to Crescent Media for an undisclosed sum to, as CEO Jeremy Barbera said, "avoid any future net income erosion related to fulfillment operations"... Consumer electronics retailer REX Stores Corp. (NYSE: RSC) pocketed $1 5/16 to $12 7/8 after it said it will sell audio and video equipment on Amazon.com's (Nasdaq: AMZN) auction service. REX Stores is using the Amazon partnership as an initial test of its e-commerce strategy.

Baby Bell SBC Communications (NYSE: SBC) rose $2 9/16 to $49 3/4 after J.P. Morgan raised its rating on the company's stock to "buy" from "long-term buy" and Lehman Brothers upgraded the stock to "buy" from "neutral," setting a $60 per share 12-month price target... Lighting systems designer SLI Inc. (NYSE: SLI) brightened $1 3/8 to $22 3/8 after saying it will resume a stock buyback program through open market purchases. No specific number of shares or dollar amounts was mentioned in the company's statement... ZDNet (NYSE: ZDZ), the tracking stock for the Internet-related businesses of information technology media and marketing company Ziff-Davis (NYSE: ZD), took on $12 11/15 to $48 11/16 after adding $17 yesterday in its first day of trading. Ziff-Davis fell $1 7/16 to $20 1/16 after dropping $7 1/2 yesterday... Golf property real estate investment trust (REIT) National Golf Properties (NYSE: TEE) drove ahead $1 1/2 to $23 1/2 after it said it bought fee and leasehold interests in 21 golf courses for approximately $176.2 million. The company also closed on a $300 million unsecured revolving credit facility.

Paper, lumber, and other wood products company Mead Corp. (NYSE: MEA) recorded gains of $2 5/16 to $33 1/16 after Morgan Stanley Dean Witter boosted its rating on the stock to "strong buy" from "outperform," setting a 12- to 24-month target price of $45 per share... Canary Islands landowner and hotel operator Scandinavia Co. (AMEX: SCF) rocketed up $9 1/2, or 200%, to $14 1/4 after it said it owns a majority interest in caching company Mirror Image Internet and is in talks to buy the rest... Real estate, water, and waste-water businesses company Avatar Holdings (Nasdaq: AVTR) rose $3 3/4 to $22 after confirming negotiations to sell its Florida utility operations; the anticipated sales price is about $212 million... Semiconductor automated fabrication systems developer PRI Automation (Nasdaq: PRIA) rose $2 3/4 to $23 3/4 after NationsBanc upgraded the stock to "buy" from "hold"...Signal processor chip maker Analog Devices (NYSE: ADI), which received a reiterated "strong buy" rating at S.G. Cowen, closed up $1 15/16 to $31 11/16.

GOATS

High-performance workstations maker Silicon Graphics (NYSE: SGI) sank $3 9/16 to $13 after warning that delays and problems associated with transitions to new product lines will result in a fiscal Q3 loss $0.20 to $0.25 per share greater than the loss of $0.07 per share previously forecasted by analysts surveyed by First Call. Strangely, SGI's shares rose 16% yesterday prior to the announcement, perhaps as traders expected a positive earnings surprise from the company. The shortfall was a surprise alright, but in the wrong direction. While the company has made considerable progress in turning its business around over the past year -- bringing in former Hewlett-Packard (NYSE: HWP) executive Richard Belluzzo as its CEO and finally embracing Wintel technology for its workstations -- execution is lacking. The next milestone for investors will come next quarter, when SGI's important R12000 microprocessor-based servers are scheduled to become available.

The continuing slowdown in enterprise software, which has hit businesses ranging from relatively small enterprise resource planning (ERP) shops to large system software developers, wrecked two more companies today, prompting visions of General Sherman destroying an ever-greater number of northern Georgia towns on his historic March to the Sea. Irish enterprise middleware developer IONA Technologies (Nasdaq: IONA) tumbled $15 7/16, or 50.8%, to $14 15/16 after saying delayed orders from the slowdown, coupled with rising expenses, will lead to Q1 results ranging from a loss of $0.03 per share to breakeven, short of the First Call mean earnings estimate of $0.18 per share. Meanwhile, enterprise document management systems developer Documentum (Nasdaq: DCTM) fell $7 3/16 to $10 1/8 after blaming weak customer demand for "substantially" lower Q1 license sales compared to a year ago. The firm is calling for a "significant" operating loss for the period, dashing analysts' hopes for earnings of $0.14 per share.

QUICK CUTS: Integrated oil and gas firm BP Amoco (NYSE: BPA) slipped $5 3/16 to $95 13/16 after ending days of speculation and finally announcing a deal to acquire Atlantic Richfield (NYSE: ARC), or ARCO, for $26.8 billion in stock. BP Amoco CEO John Browne said he expects the combination will yield $1 billion in annualized cost savings by 2001. ARCO ended the day down $11/16 at $72 7/16... Branded natural food and beverages maker Balance Bar Co. (Nasdaq: BBAR) was knocked off-kilter by a $3 1/16 loss to $6 3/4 after saying higher-than-expected seasonality for its energy bars will lead to Q1 EPS between $0.05 and $0.06, roughly half of the First Call mean estimate of $0.12... Apex Mortgage Capital (NYSE: AXM) lost $1 to $12 1/2 after PaineWebber cut its rating on the real estate investment trust to "attractive" from "buy."

Enterprise network security products provider Secure Computing (Nasdaq: SCUR) was thrown for a $4 5/8 loss to $5 7/8 after pre-announcing a Q1 loss of $0.30 per share (excluding charges). Analysts had been expecting earnings of $0.10 per share in the period... Pharmaceutical marketing services provider Access Worldwide Communications (Nasdaq: AWWC) slid $9/16 to $7 3/16 after saying it sees Q1 EPS between breakeven and $0.03, down from $0.07 a year ago. Access also said it has hired Bear Stearns to explore strategic alternatives, including a possible sale of the company... Business computer security services firm Axent Technologies (Nasdaq: AXNT) lost another $4 1/16 to $20 after falling 26% yesterday on announcing a plan to acquire UK-based PassGo Technologies for about $50 million in stock.

Outdoor sportswear designed Columbia Sportswear (Nasdaq: COLM) slid $3 1/4 to $16 3/8 after Needham & Co. downgraded the firm to "hold" from "buy," citing valuation concerns... Meanwhile, Columbia rival The North Face (Nasdaq: TNFI) slumped $1 1/2 to $11 after saying its 1997 EPS will be reduced by $0.26 and its 1998 EPS will be cut be $0.32 due to a restatement of its financial results to account for certain transactions over the past two years... Energy and security services holding company Western Resources (NYSE: WR) dropped $1 3/16 to $25 1/2 after saying its Protection One (NYSE: POI) residential security unit will restate its 1997 and 1998 results after the SEC raised concerns about certain accounting policies. Protection One fell $2 1/4 to $4 and Lifeline Systems (Nasdaq: LIFE), which is being acquired by Protection One, sank $4 3/16 to $19 5/8.

Over-the-counter health and consumer products company Block Drug Co. (Nasdaq: BLOCA) was tackled for a $3 3/8 loss to $37 5/8 after agreeing to sell the Lava brand of hand soaps to lubricants maker WD-40 Co. (Nasdaq: WDFC) for unspecified terms. WD-40 also lost $1/2 to $28 1/2... Safe blood transfusions systems developer Cerus Corp. (Nasdaq: CERS) bled $1 3/16 to $21 1/16 after selling 2.2 million newly issued shares in a secondary offering yesterday at a price of $21 per share... Stephan Co. (AMEX: TSC) slipped $2 3/4 to $6 after the hair care and personal care products company said it miscalculated its costs of goods in 1998, which will lead to "significantly" lower than expected results for the year and possibly restatements of its Q2 and Q3 financial figures.

FOOL ON THE HILL
An Investment Opinion
by Warren Gump

Nix the Dividend Yield

The sky is falling, the sky is falling! Sell, sell, sell. You might get that indication from people who are looking at the dividend yield of many stocks. Fast food giant McDonald's (NYSE: MCD) has a current dividend yield of about 0.4%, down from 1.0% at the beginning of the 1990s. And McDonald's isn't alone. Most other major companies have dividend yields that are well below those in recent memory. What's going on here? Are the low yields a reason to panic?

Before getting into the several factors impacting dividends, it's important to understand how the dividend yield is calculated. You take the dividends per share paid over the last twelve months and divide that by the current price of the stock. Looking at McDonald's, the company has paid out dividends of $0.184 per share over the past twelve months. Dividing that dividend by the current stock price of about $46 results in a dividend yield of 0.4%.

Hold on, my dear friend, that is the dividend that has been paid out over the past twelve months. What about the next year? As investors, we are always looking forward rather than backwards. Many companies, including McDonald's, raise their dividends each year. This past January, McDonald's raised its payout to 4.875 cents per share every quarter from 4.5 cents. Since this dividend is likely to continue over the next year, it is more appropriate to use the prospective dividend rather than the historical number. Multiplying the quarterly dividend by 4, we calculate the dividend over the next year to be $0.195. Using the current $46 price as the denominator of the calculation, we find the McDonald's prospective yield is 0.42%. Not a huge difference, but one I'm sure Mickey D's shareholders appreciate.

Why is that dividend so much lower than the 1% available at the end of 1990? The company must have run into a lot of trouble and cut the dividend somewhere in the past, right? Actually the answer is no. Since 1990, the dividend has actually increased almost 150% per share! At the beginning of 1990, McDonald's quarterly dividend was a tad under 2 cents per share, yet it is now almost 5 cents per share. That's compound annual growth of over 10% a year.

If the dividend has gone up and the dividend yield has gone done, only one culprit in the equation remains. The share price must have appreciated much more quickly than the dividend. This fact is undeniable -- the stock has risen from just under $9 to over $45, or compound annual growth of just under 20% per year. Does price appreciation greater than dividend appreciation indicate that a stock is overpriced? Not necessarily. The value of a company depends much more on its current and projected cash flows and earnings than on its dividend yield.

Despite not being a primary driver of valuation, a dividend does represent excess capital that is not needed by a company for other investments. The most important use of cash generated by a business is to ensure that a company is prepared to maintain and enhance its competitive position. This means investing in facilities and programs to ensure that a company is more efficient than its competitors. Cash is also needed by a company to address new growth areas. If the jingle of cash is left over on a balance sheet after these initiatives are covered, companies often return it to shareholders. Historically, cash earmarked for shareholders has been paid out in quarterly dividends.

Over the past several years, companies have significantly altered the method in which they return cash to shareholders. Instead of paying the money out in dividends, a taxable event for most individuals, the many companies have decided to return the funds to owners in the form of share repurchases, which are not subject to Uncle Sam's wide grasp. For investors with a long-term investment horizon, this switch is quite advantageous.

Let's assume that Cash Machine, Inc. generates $1 million in excess cash flow a year that it wants to return to shareholders. One option to distribute the cash would be to pay an annual dividend of $0.50 per share. Assuming a price of $10 per share and 2 million shares outstanding, this would represent a yield of 5%. For owners who reinvest their dividends into additional shares of company stock, the situation really stinks. A holder of 100 shares would receive a dividend of $50 that would then be used to buy an additional 5 shares. At year-end, however, good ol' Uncle Sam would open up his hands and request a deposit of $14. Thus, the owner would have 5 more shares, but would be out of pocket an additional $14.

An alternative for Cash Machine would be to repurchase its shares. If it used all its extra cash to repurchase shares and the stock stayed at $10 a stub, the company would buy back 100,000 shares with its $1 million cash horde. The question now becomes, which alternative is better for the shareholder?

Under the traditional dividend scenario, the shareholder bought 5 shares with her $50 dividend, but also paid $14 to Uncle Sam. At the end of the year, she holds 105 shares of a company with 2 million shares outstanding (0.00525% of the company). On the other hand, the shareholder whose company chose to repurchase stock holds 100 shares of a company with 1.9 million shares outstanding (0.00526%). I'll take the latter any day. You hold a higher percentage of the company and you get to defer gains to Uncle Sam until you decide to sell your investment, which will hopefully be years in the future.

As corporations have increasingly recognized the benefits of stock buybacks over dividends, they have slowed their dividend increases and increased the amount of stock repurchases. As a long-term investor, I'm fully supportive of this move. This change does, however, cause the dividend yield to become irrelevant. If companies substantially reduce their 'payouts via dividends, how can you know how much cash the company returned to shareholders? The solution is actually pretty simple. All you need to do is find out how much the company expended on stock repurchases over the past year (available on the cash flow statement) and add this to the dividends paid. I call this measure the modified dividend.

Modified Dividend Yield:

(Dividend per share + trailing 12 months repurchases per share) / stock price

Looking back at McDonald's, we already know that the company paid $0.184 per share in dividends. Taking a look at the company's recently filed 10-K, the company repurchased $1.1 billion worth of stock in 1998. With 1.4 billion average shares outstanding during the year, the repurchase equals about $0.766 per share. Plugging these figures into the formula, McDonald's modified dividend yield would be 2.07%:

(0.184+0.766)/46=2.07%

That modified dividend yield is a better reflection of how much cash McDonald's is returning to shareholders than its traditional dividend yield. I would propose that you use such a measure to see what your companies are returning to you. Most people look at Intel (Nasdaq: INTC) and see a company paying a paltry dividend of 0.1%. I look at the company and its $6.8 billion in stock repurchases and see a modified dividend yield of 1.8%.

A yield calculation including stock repurchases will not hold as steady as the traditional dividend yield. Companies can easily alter the amount of repurchases on a yearly basis, whereas its considered a big taboo to reduce a dividend. (A reduced dividend payout usually only occurs when a company is in financial distress.) Although fluctuations in the numerator of the modified dividend yield will be more prevalent, I believe it is much more informative statistic than the dividend yield.

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