Q. What are "tracking stocks"?
A. Bought and sold like regular stocks, tracking stocks are usually issued by companies with several different lines of business. They serve as an alternative to spinning off divisions.
Imagine Buzz-n-Boom Corp. (ticker: BZBM). It runs a chain of hair salons and also manufactures fireworks, which are more profitable. A high interest level in fireworks might spur the company to issue a tracking stock for the fireworks business. This will help investors see the value of the fireworks operations, separate from coiffures.
When a company issues a tracking stock, it has to prepare three sets of financial statements instead of one. One set will reflect the company as a whole. A second set will reflect the business line being tracked. A third will reflect the company's operations, excluding those belonging to the tracking stock. The company hasn't really split up, but for reporting purposes its assets, expenses, income, and cash flow are allocated between the company and its tracking stock.
The appeal of tracking stocks is that they can help investors see a company's full value. For example, a few years ago, AT&T (NYSE: T) might have imagined that investors were just thinking of it as a fuddy-duddy giant telephone company. So it issued a tracking stock for its wireless unit, AT&T Wireless (NYSE: AWE), drawing attention to its dynamic wireless operations. The reasoning is that these operations may, on their own, be accorded a higher value than if they remained embedded in regular AT&T stock. Higher-valued shares can be used as currency when the company wants to buy another firm or forge an alliance.
The downside to tracking stocks is that they're not backed by corporate assets in the same way as regular stocks. With regular common stock, shareholders own a chunk of the underlying company. With tracking stocks, the company retains ownership, but shareholders get to enjoy returns that track a specific part of the company's business.
In the late 1990s, more and more companies issued tracking stocks. General Motors (NYSE: GM) issued Hughes Electronics (NYSE: GMH) stock, AT&T issued stock for its Liberty Media (NYSE: L) cable business, and Sprint (NYSE: FON) issued stock for Sprint PCS Group (NYSE: PCS). In the last year or two, though, tracking stocks have lost their luster. WorldCom (Nasdaq: WCOM) recently announced plans to retire its MCI (Nasdaq: MCIT) tracking stock.
Learn more about tracking stocks in this special feature and this Fool article. To learn about investing Foolishly, visit our Fool's School. Or check out some of our inexpensive and well-regarded online seminars (which feature money-back guarantees).
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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
Reader Responses to Previous Articles
Really bad article on probate. This is one of the least do-it-yourself financial issues on the planet. I am a free lance paralegal (with 19 years of experience) and while people need to think on this, links to an attorneys website not the way to go. The best advice, after reviewing the issues, would have been to tell people to seek out an attorney to consult. This is not like investing, in that something that works in New York will work in Alaska. Most states have differing laws and inheritance tax structures. Also, the mania for these living trusts is a problem in states with inheritance taxes. While they do eliminate or reduce probate, they will not reduce your taxes one cent. Here in my area, for a while there was a scam artist going to senior centers and charging $800 to prepare a living trust, while the average cost of having an attorney do the probate and tax return was under $700. -- M.D.
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Your article on probating a will and the corresponding estate was obviously well intentioned, but was wrought with incorrect generalities. I am an estate-planning attorney in Georgia, and probate, on average, three to six wills per month. Probate is actually the offering of the will to the probate court. In Georgia, this is a quick hearing before the judge to validate the will and grant the executor letters testamentary so that he/she can administer the estate. This usually costs our clients no more than $750. During the administration, the estate can incur some fees, but we have not charged more than 1% of the value of the estate. Additionally, these fees are deductible on the estate tax return on a dollar-for-dollar basis, as are accountant's fees.
In Georgia, like in many states, the executor is permitted to receive compensation for the administration of the estate. This compensation is generally in the neighborhood of 5% of the value of the estate. Your executor is generally someone you love (a spouse, child, etc.), so this is a good way to pass money to them, and receive a tax deduction on the estate's tax return. Also, as you can see, the executor's fees are certainly more substantial than any fee my firm has ever charged for legal services.
Property only remains in limbo while you wait for the estate tax return to be accepted by the IRS. This is typically a nine-month period. Even during this period, real property can be transferred as long as some funds are retained to ensure that any additional taxes incurred can be paid. Your article ignores the fact that accountants and estate-planning lawyers are employed to try to reduce the amount of estate taxes owed to the government so that more can be passed on to an individual's loved ones. All too often, we receive calls from individuals whose loved ones tried to do their own estate planning, and now the grieving heirs are stuck paying huge estate taxes, or dealing with an audit. Helping people to avoid this kind of headache and heartache is the very reason why I am in this profession. -- C. D.
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[Regarding an article on Finding Mortgage Lenders] It has been my experience over the past 43 years of being in the business of mortgage finance that dealing with banks and local credit unions is a sure way to not get the best mortgage on your house. Excepting very large bank players such as Washington Mutual and Bank of America, the rest are staffed with truly second-rate loan officers. The service is marginal and the rates reflective of their lack of volume and expertise. It's far better to deal with a quality mortgage broker or a major bank-owned mortgage company, like Wells Fargo. -- J. E. K.
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[Also regarding the article on Finding Mortgage Lenders] Banks, savings banks, and credit unions can be a great source for mortgages. But mortgage brokers account for nearly 70% of all mortgage originations. A vanilla consumer with a large down payment or equity, strong documented income and excellent credit, will certainly get a good rate from these institutions. They will also get a comparable rate and fees with any reputable mortgage banker or mortgage broker. But more importantly, most mortgage brokers or mortgage bankers will complete the loan process in less than half the time and expose the borrower to a much larger range of financing options.
Consumers with bruised credit or other less-than-perfect underwriting items could waste time with institutions before being told that they are not approved. Most banks, savings banks, and credit unions in today's market operate as mortgage bankers and sell their loans in the secondary market just like mortgage bankers do. Their cost of funds is the same, if not higher, than mortgage bankers because of operating inefficiencies. Mortgage brokers simply provide part of the process to any loan. Wholesale mortgage bankers, banks and savings banks outsource the origination process of the initial loan application to mortgage brokers and provide discounted wholesale pricing to them reflecting their savings by not having to do what is the most costly part of the loan process themselves. There are disreputable mortgage brokers, but as a whole they account for a small percentage of brokers. Due to the large percentage of loan originations that are done by mortgage brokers, it may seem like more consumers have been taken advantage of by disreputable mortgage brokers, but that is purely mathematical.
You mentioned that consumers should search out low rates. Consumers should check several sources for loans: local bank, savings bank, credit union, and local mortgage companies. The best source is a referral from family, friends, or co-workers who had a good experience. Yes, the Internet is a good place for consumers to educate themselves and to get an idea of where rates are. [I've heard of some] problems with Bankrate.com although I would not discourage your readers from going there. There are several others; LendingTree.com, MortagageSelect.com, etc. My favorite is SmartApply.com. Nothing beats the personal touch and service of a local mortgage company, where you can meet the loan officer face to face -- day, evening, weekend, or even in your own home.
In your "Financing Your Home" area, the information provided there or at least the portions I read are for the most part accurate, but I think it is a little harsh in regards to mortgage brokers. -- Tom Douroux, Southern CA Regional Manager, Colorado Federal Savings Bank
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