Drip Portfolio Report
Thursday, August 14, 1997
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (Aug. 14, 1997) -- The Drip Portfolio will make its first purchase next week, meaning, we're going to send out our first check. The MoneyPaper buys the initial share of stock for everyone at the end of each month, so we want our check to get there before the end of August. We'll buy a share in one or perhaps even two companies if we can get to a second decision by next Friday.
During September then, we'll become enrolled in our first one or two dividend reinvestment plans, and in the meantime we'll work to decide upon our next few purchases before the third week of that month, too. With this time frame, by the end of October our first five to six purchases should be made, and we'll have already sent additional money to some investments to buy more shares. Over the long term, the portfolio will grow to about eight stocks.
Next point: We're adding $100 to the Drip Port tomorrow. As explained, we're adding $100 to the portfolio on the 15th of every month. Most of our investment checks will be mailed to our companies around the third week of each month, so adding the money just before then makes sense. This doesn't mean that our portfolio's return is suddenly 20%. ($500 + $100 = 20% gain. "Wooo-hooo! YES!") Nope. Sorry. We average the additional money into the existing base. We're still sitting at a big fat 0% return, but tomorrow the portfolio will have $600 to put to work. Hopefully readers can save $100 per month as well (or more) and invest it.
THE MARKET: Even after the stock market has made such a strong advance, Dividend Reinvestment Plan investing is very Foolish and smart -- in fact, it's one of the best ways to start and continually invest, in any market. This type of investing is especially smart, though, in what has been a high flyin' market. Even as we begin to invest, we're sitting here hoping that stocks finally go down! If they do drop, we win in the long run because we're dollar-cost averaging into great companies. If stocks don't fall, but keep rising, we win, too. If you're investing long term in leaders, you're in a win-win situation, and even more so with this type of investing.
COCA-COLA: We said last week that we wouldn't mind -- that we'd be happy, even -- if the stock of Coca-Cola would fall over the coming years, and so far it has. In one week the stock has dropped from $68 to below $60, losing $20 billion in market value. Coca-Cola now trades at 32 times next year's estimated earnings, and those estimates have been lowered by six cents per share in the last week (which is a primary factor in the stock's fall). So how is the stock valued now?
As we've said before, the current valuation of our companies means almost nothing to us -- heck, we're buying ONE share to start. Let the stock fall $20 the day after we purchase it! Who cares. What matters is where the stock goes over the next twenty years as we steadily build a position.
That said, for kicks: with a 17% to 18% annual growth rate expected at Coca-Cola, the S&P sporting a lower growth rate and trading at a multiple of 23, and considering Coca-Cola's business position, if the company were to trade at 25 times trailing earnings the stock might be in the "fair value" ball park, in my opinion. That multiple is higher than the growth rate, but as long as management delivers, the stock deserves a premium in this market or almost any market, as do the stocks of Microsoft, GE, and Schering-Plough. At $48, Coca-Cola would trade at 25 times next year's estimated earnings. It's at $59 and pennies as I write this. Not too bad. If we begin to buy Coca-Cola, not only would we be buying a world-leading company with enviable fundamentals and a great business, but apparently we wouldn't be paying an outrageous amount to start, either.
Not a shocker: Coca-Cola will almost certainly be the Drip Portfolio's first purchase. Randy needs to write his thoughts on it and we need to look more deeply at the business next week, adding to our introduction of Coca-Cola in part 1 and part 2. For now, consider that by the year 2015 -- 18 years away -- the world population will have risen from 5.7 billion to over 8 billion people. Eighteen years is only 6,570 days. Coca-Cola is going to be busy.
--- there's so much background information to consider about the company (mainly asbestos and debt-related), and Randy has done a great job at explaining it, but I view all this necessary "ancillary" data as a warning sign. If we need to spend so much time on this part of the business, obviously management spends much more time on it -- time that should be spent focusing on earnings from continued operations and on the balance sheet, things that Randy hasn't been able to address yet, either.
--- the fact that Owens Corning has completed acquisitions to the tune of $1 billion in the recent past is a bit worrisome, too. It's great to see the business expand, but it will take time to see if there's synergy and if the acquisitions positively impact the bottom line, in earnings, and thus if the company can begin to pay down its $1,850,000,000 in long-term debt. The company has $15 million in cash and equivalents.
--- I appreciate that the stock trades at only 15 times earnings even when including all the debt, while the S&P trades at 23 times earnings, but as Randy would agree, the current business easily merits the lower multiple. Owens Corning is a respected leader in fiberglass, but it hasn't been a leader in running a business -- any business. Management has generated only a 3.5% annualized return for shareholders over the past five years. Add to this the uncertainty of the 165,000 current personal injury lawsuits (even though Randy figures that these represent a potential liability of only about $210 million) and the lower share price is understood. (165,000 lawsuits. Geesh. At $10,000 a pop. Pity the insurance company.)
--- That said, I've far from written off the company as an investment. Randy's argument, in whichever direction he finds it to be, will surely have substantial merit. We'll see. First we need to see if he likes the company. Then we need to surmise as well as we can that Owens Corning will offer value that supersedes the merits of the other investments that we're considering, all of which we want to be:
1. Cash rich and debt free.
2. Consistently growing earnings by double digits.
3. Consistently repurchasing shares.
4. Sporting double-digit net margins.
5. Consistently improving return on equity.
6. Industry dominant.
7. And all of this: Sustainable.
Finally, an additional "fat daddy" bonus to look for in a 20 year investment:
1. A repeat purchase, consumer-oriented business.
Tomorrow we'll look at the best-performing DRPs from 1985 to 1995 to see what they have in common. We'll also list useful resources for information on Dividend Reinvestment Plans for weekend research if you're interested in getting started.
--Jeff Fischer, Fool
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