DRIP PORTFOLIO

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Mellon Checklist
Fun with financial statements

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (July 29, 1999) -- We'll complete our second-quarter earnings season wrap-up with a look at financial services stalwart Mellon Bank (NYSE: MEL). While all three of the active positions in this portfolio are models of consistency, Mellon is in a league of its own. Some might even say this company borders on a "buy it and forget it" type of investment. That's fine with us -- the less time we have to think about our investments, the more time I can spend playing video games and Jeff can spend reading comic books.

While we are unabashed advocates of long-term investing and staying the course year after year with your stocks, it isn't a bad idea to check up on your companies every once in a while. Drip investors don't want to be caught with their pants down when a company's financial underpinnings start eroding over time or when its competitive advantage becomes a thing of the past. Spending some time with your company's quarterly earnings release is a great way to stay abreast of any changes.

One of the best ways to check up on your company's financial progress quarter to quarter is to develop a checklist of performance items that you can keep an eye on over time. Comparing items such as revenue and earnings growth, profit margins, and profitability ratios from the latest period to past periods can give you a sense of what the company's important moving parts are and where management is focusing their attention.

Remember, analyzing companies is not an instinctive exercise for human beings, who have spent most of their time on this planet deciding between fight or flight, not buy, sell, or hold. It takes time to understand how a company makes money and what makes it tick. Tracking certain aspects of a business over time can help you do just that.

So, what types of items are on our Mellon checklist? We'll highlight the three financial areas derived mainly from the income statement that we like to track quarter to quarter, and examine each one individually.

Revenues

With Mellon, we are particularly interested in the noninterest revenue or fee revenue line, which accounts for sales dollars coming from the high-returning trust, investment management, and administration and custody businesses. This past quarter, total fee revenue (before gains tied to the sale of Mellon's credit card business to Citibank in March) came in at $787 million, up 10.5% from a year ago and roughly flat with the previous quarter. Through the first six months of the year, total fee revenue is up a healthy 11.8% to nearly $1.6 billion and now represents 69% of total revenue, up from 66% a year ago.

Expenses

While the revenue advances may not seem eye-popping, Drippers should keep in mind that the gains occurred with very little added expense by Mellon. During the period, core operating expenses (which exclude a ton of stuff, such as charitable contributions, trust-preferred securities expense, and net revenue from acquired property) rose a scant 2% year over year and 1% sequentially.

Profits and Profitability

Holding costs low allowed Mellon's earnings per share (before goodwill amortization) to rise 11% from a year ago to $0.50. Annualized return on equity at the end of the quarter remained above our target level of 40%, while return on assets is humming at a 2.23% annual rate, up from a 2.12% rate at this time last year.

These three checklist areas are not the end of the story, of course, but they provide a decent overview of how well the business performed over the period.

One other development that does not fit into the three above categories but is of interest to shareholders is the progress of the company's ongoing share-repurchase plan. During the quarter, Mellon bought back 8 million of its shares, adding to the 5.4 million repurchased in the first quarter. Some 6.6 million shares remain available for repurchase under the most recent buyback authorization from January, which could be used up by the end of the year if the company maintains its recent buyback rate.

All in all, things look to be shipshape at Mellon and no red flags jumped out at us. That's good, considering that surprises (either positive or negative) are something that we do not expect very often from this company.

With half the year gone, now may be a good time for investors to also take a peek at the company's balance sheet, statement of cash flows, and other financial schedules as well. These statements can be pretty complicated, but hopefully we will be able to take a closer look at some of the key moving parts when Mellon's 10-Q report for the first half of the year becomes available on the SEC's Edgar system. In the meantime, you can brush up on your banking number-crunching by looking at some of Mellon's past 10-Qs and 10-Ks, which can be accessed right here at the Fool.

[To discuss this column and direct investing, please visit the message boards linked in the top right of this page.]

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7/29/99 Close

Stock   Close   Change
JNJ     93 1/4   -2 1/2
INTC    69 1/2   -13/16
CPB     44 9/16   0
MEL     34 7/16  -5/86
              Day     Month    Year    History
Drip        (1.41%)   3.17%    7.16%    21.87% 
S&P 500     (1.78%)  (2.31%)   9.67%    42.80% 
Nasdaq      (2.43%)  (1.70%)  20.40%    65.64% 


Last Rec'd  Total# Security In At   Current
 05/03/99    8.134   CPB   $52.793  $44.563
 07/01/99   21.066   INTC  $41.861  $69.500
 03/09/99    9.076   JNJ   $74.910  $93.250
 06/07/99   22.453   MEL   $33.488  $34.438


Last Rec'd  Total# Security  In At   Value    Change
 05/03/99   8.134    CPB   $429.42   $362.47  ($66.95)
 07/01/99  21.066    INTC  $881.84  $1464.08  $582.24 
 03/09/99   9.076    JNJ   $679.89   $846.34  $166.45 
 06/07/99  22.453    MEL   $751.91   $773.24   $21.33 


Base:  $2800.00
Cash:    $24.29**
Total: $3470.42

The Drip Portfolio has been divided into 110.619 shares with an average purchase price of $24.408 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

**Transactions in progress:

7/26/99: Sent $100 to buy more JNJ.



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