Tuesday, March 10, 1998

Cash-King Portfolio Report
by Phil Weiss

TOWACO, NJ (Mar. 10, 1998) -- Before launching into tonight's report, I'd like to offer a very brief explanation about why The Cash-King Portfolio is buying the RP4 variation of The Foolish Four, even as the Dow Research Squad (DRS) in Fooldom may have turned up that a five-stock RP model is the best performer (per Robert Sheard's column on RP last night).

We're buying the four-stock variation because at the time that we inked our report last week, that was the most impressive of the models. Ah, well. In truth, it doesn't look to us like there's a meaningful enough difference between the two to warrant changing our plans midstream. We feel like we're choosing between Joe Montana and Steve Young, here. No big deal. Plus, by sticking to the four stocks, we can skip Philip Morris (bleck)! To read our buy report on our Foolish-Four selection, click here: CK is Buying Exxon, GM, Chevron, and Eastman Kodak.

If you have questions about this, please drop by the Cash-King Message folder.

Ok, on to today's report...

Have you ever wondered why some companies provide special benefits to individual shareholders? For example, 3M Corporation gives its shareholders discounts on some products during the holiday season. Disney offers its owners reduced rates on tickets for Disney theme parks and discounts for items purchased in the Disney Store. Wrigley's sends a box of gum each year to its investors.

While we won't be getting any freebies or discounts from our existing five investments in the Cash-King portfolio, three of our holdings -- Pfizer, Intel, and Coca-Cola -- are among a growing number of companies that offer Dividend Reinvestment Plans (DRIPs), which allow shareholders to purchase stock directly from a company at regular intervals with little or no incremental cost per investment.

Each of these shareholder benefits is an expense for the public companies that provide them, so you may be wondering if this is a good use of shareholder monies. I think it's a pretty Foolish practice, is worth the money, and I believe that many more companies should provide similar shareholder perks. Lemme explain...

Let's break shareholders down into two broad classes � traders and investors � and look at the characteristics of each. Traders generally buy and sell stocks frequently in large blocks. They try to time up short-term entry and exit points, hopping around the public markets like rabbits. The other class of shareholders are the investors, who buy businesses and focus on the long-term merits of the enterprise. In their research, they study a company's fundamentals and then ultimately aim to hold for long periods of time to manage down the costs of investing (commissions, taxes, joylessness, et cetera).

Now, at different times in our lives, we all play a bit of the investor, a bit of the trader, and many roles in between. But which class of shareholders are public companies looking to attract? Certainly, the latter -- the loyal owners not the traders.

There are key advantages to having a large stable of faithful investors. I'll name two of many:

First, it may seem small, but a company doesn't have to change its shareholder register often. You know all those different mailings that you receive from companies -- annual reports, quarterly reports, press releases, et cetera? Well, it's not a simple (or cheap) process to maintain the list of people that should receive them (even when they come through your broker). When you buy and hold a stock, the company doesn't have to make changes to its shareholder register.

Second, when investors hold onto their stock for long periods of time, the company's stock also becomes more stable. We're talking the forces of supply and demand here. If I buy a stock and put the shares away for two decades, I've retired a portion of the overall supply of ownership. When there's less stock available for others to buy, the share price of the company is stabilized (though, of course, by an insignificant amount when measured one shareholder at a time).

Now, how does that relate back to shareholder perks? Why would companies go to the expense of offering the benefits that I've mentioned to individual shareholders? Let's start with consumer mindshare. If I own stock in a company, I do find myself more likely to buy its products over all others at every opportunity. Here are a three examples. My first choice for baby formula is always Similac � made by Abbott Laboratories (ABT: NYSE), of which I'm a part-owner. And when it comes to soft drinks and fruit juices, I try to slurp down products made by Coke whenever convenient. Finally, when buying a personal computer, I do make sure that it's got an Intel Inside label on it.

It's interesting. When investing, I try to buy positions in companies whose products and services I love. But then I find that once I'm investor, I start demanding the products and services of the companies I own! And so... by offering freebies and discounts to shareholders, public companies would just be fueling demand. I'm pretty certain that market research would confirm, particularly for consumer franchises, that discounts or product rewards to shareholders increase their demand and inspire them to evangelize the company to others. The benefits outweigh the costs.

And now, it's time for the confessional.

I want our CK companies to start throwing out some perks! 5% off on the purchase of any personal computer, via Intel? A free case of Fruitopia? Discounts on Microsoft applications software? A bottle of Plax dental rinse from Pfizer? A free copy of T. Rowe Price's Roth IRA computer CD? I'm smiling as I write this, but to be honest... would these not make me more committed to the products of the companies I own and thus more committed to my ownership position?

To close, this approach won't work for a company whose business is fragile, whose products are lousy, and who doesn't care to build long-term buzz about its organization. But our Cash-King companies are leaders, ever looking to increase that lead. It seems to make a good deal of sense to me to strengthen the relationship between these public companies and their slew of private shareholders beyond the occasional press clipping and delivery of the 10-k statement. This isn't a pressing, huge issue... it just makes good sense to me.

Have a great night and Fool on,

Phil Weiss (pweiss@homemail.com)


Stock  Change    Bid 
 KO    +  1/8   72.69 
 INTC  +  3/8   75.44 
 MSFT  +1 7/8   81.44 
 PFE   +1       87.88 
 TROW  +  1/2   69.00 
                  Day   Month    Year  History 
         C-K      +0.46%  -1.05%   0.69%   0.69% 
         S&P:     +1.14%   1.42%   6.29%   6.29% 
         NASDAQ:  +1.35%  -1.24%   5.79%   5.79% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     87.88     6.78% 
    2/27/98   27 Coca-Cola     69.11     72.69     5.18% 
    2/3/98    24 Microsoft     78.27     81.44     4.05% 
    2/6/98    28 T. Rowe Pr    67.35     69.00     2.46% 
    2/13/98   22 Intel         84.67     75.44   -10.91% 
     Rec'd    #  Security     In At     Value    Change 
    2/27/98   27 Coca-Cola   1865.89   1962.56    $96.67 
    2/3/98    22 Pfizer      1810.58   1933.25   $122.67 
    2/3/98    24 Microsoft   1878.45   1954.50    $76.05 
    2/6/98    28 T. Rowe Pr  1885.70   1932.00    $46.30 
    2/13/98   22 Intel       1862.83   1659.63  -$203.21 
                               CASH  $10696.94 
                              TOTAL  $20138.88 
 *The year for the S&P and Nasdaq will be as of 02/03/98