Drip Portfolio Report
Friday, August 15, 1997
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (Aug. 15, 1997) -- It's good to see the stock market decline.
Over the weekend, this is probably the only column where you'll see that statement made. Most of the Wise media will be screaming, pulling their hair out, running headlines such as "The Stock Market Plummets!" -- as if the median age of the country wasn't 34 and most people didn't have decades more during which to invest. As we've said before, if you're investing steadily for the next decade or more, you should hope for lower prices now. Makes sense, no?
So, we're happy to report that the S&P fell 3.51% this week. In fact, the Dow Jones Industrial Average has lost over 650 points in the past six days, or nearly 8%. The Drip Portfolio has easily outperformed the market since inception, holding steady at 0.00% returns.
(That was a small attempt at a joke -- but, actually, it's true.)
Without suffering through more banter, let's look at the list of the best performing DRPs from 1986 to the end of 1995. The list shows how $1,000 invested at the end of 1985 grew over the ten-year period while in the dividend reinvestment plan of each of the 10 best-performing companies that offer plans:
$1,000 value on Dec. 31, 1995* Home Depot (HD) $39,800 Paychex (PAYX) $20,880 Computer Associates (CA) $20,100 Fannie Mae (FNM) $17,100 Gillette (G) $14,300 Cracker Barrel (CBRL) $14,300 Wrigley (WWY) $12,800 Omnicare (OCR) $12,700 Coca-Cola (KO) $12,680 Countrywide Credit (CCR) $12,480 *numbers from USA Today, 1996
Interesting about the list is that for the past years, none of the best-performing companies have offered a large dividend yield. The highest yield on the list currently comes from Fannie Mae, at a "big" 1.9%. The next highest is Wrigley at 1.0%. Coca-Cola is nearly at 1.0% now, too, while heck, Cracker Barrel doesn't even pay a dividend. When you hear that you should invest DRP money into stocks (utility companies, for instance) that pay high yields (4% to 5%), you may want to think again. Capital appreciation is usually the stallion that Fools want to hop onto, rather than hopping onto the smaller "yield pony." An exceptionally high yield too often represents a pretty tame, underperforming stock.
The list above holds a cornucopia of industries, from soft drinks to home mortgages. And Omnicare, a pharmaceutical repackaging company, has grown from under $200 million in sales four years ago to over $500 million in 1996 -- in other words, it was a small company. They're not all giants, and they're not all consumer-oriented.
Home Depot, a popular retailer, has grown annual sales from $7 billion to over $19 billion since 1993, but the company has net margins of only 5%. It isn't likely that Home Depot would meet our requirements, so if we were beginning this portfolio ten years ago and had skipped Home Depot (with a long explanation here), we'd look like idiots right now. It's a leading company, and impressively run, but with low margins, debt, and well -- frankly, retail isn't the greatest industry to bet on for decades. Sears has done well this past century and The Gap has done well for over two decades, but retail in general is a tough, low-margin business. We'll consider industry leaders, though, and Home Depot is one of them.
What else do these companies have in common? Aside from steadily growing sales and earnings, keeping receivables in line, and improving return on equity, many of these companies have decent balance sheets, as well. The most recent numbers, in millions:
Company Cash & Equiv. Long-term Debt Home Depot (HD) $1042 $1260 Paychex (PAYX) 176 0 Computer Associates (CA) 240 1660 Gillette (G) 115 1480 Cracker Barrel (CBRL) 34 64 Wrigley (WWY) 310 0 Omnicare (OCR) 129 1 Coca-Cola (KO) 2200 949
Debt isn't a death-knell -- smart leverage grows businesses in directions not possible without debt -- but debt strangles a company that doesn't generate enough cash to pay down that debt in a timely manner. I wouldn't worry much about Gillette's $1.4 billion in debt, as acquiring companies like Duracell shouldn't be a detriment to long-term profitability, but the opposite. Though, in most cases, I'd rather be investing in Intel with its $8.34 billion in cash and almost no debt than in a company that was leveraging itself in order to grow. Companies with piles of cash and no debt have that much more opportunity and freedom -- and are more likely to be buying back company stock every year, as do Intel, Coca-Cola, and Schering-Plough.
Speaking of INTEL (Nasdaq: INTC), the stock has returned over 43% annually this decade, while a $235 purchase of Intel's stock in 1971 is now worth over $90,000.
The only technology company that I know of with a better balance sheet than Intel is Microsoft, but Microsoft doesn't offer a DRP. The only company that dominates its technology sector with a grip like Microsoft's is Intel. Intel offers a DRP. It's high on our priority list, especially as the company has largely made itself a consumer-oriented business. Thanks to its successful "Intel Inside" advertising campaign, if you're about to buy a computer without the "Intel Inside" sticker on it, you may feel slighted, alone... even concerned. You want to know that it's Intel in there.
We'll announce our first DRP purchase next week. It's going to be Coca-Cola or Intel. Or maybe both. The stocks that we want to look at next, and keep looking at, include Schering-Plough, Johnson & Johnson, General Electric, Owens Corning, Fannie Mae, and many others. On our message board -- which is well populated with helpful Fools from across the country -- folks are posting their top-five DRP companies. Post your favorites, too! We'll be taking apart dozens of companies here even after we decide on the ones that we want to initially purchase, and we'll have guest writers doing so too. Check out the message board for helpful information and to post your favorite DRP companies for consideration.
If you want to catch up on the Drip Portfolio, the past reports are all archived (on the top left of the Web page or on the top and bottom right on AOL), and the portfolio background information is always available. Finally, listed below is useful information on dividend reinvestment plans and services, in case you're interested in getting started.
Have a great weekend, Fools. Get some rest. Next week here we need to take action and send off some money. That'll be good! Fool on...
INFORMATION ON DRP PLANS
1. Direct Stock Purchase Plan Clearinghouse, at 800-774-4117. This free service allows investors to order up to five prospectuses from companies that offer DRPs. (This is for direct stock purchase companies only, not DRP only companies.)
2. Standard & Poor's Directory of Dividend Reinvestment Plans, at 800-852-1641. This annual directory lists all the companies with dividend reinvestment and direct-purchase plans and provides details. Price: $39.95.
3.The Direct-Investor website, at http://www.netstockdirect.com, offers a list of companies with direct investment plans, updated daily. You can also get a copy of the list by calling 900-225-8585. The call costs $2.50.
4. The Moneypaper website, at http://www.moneypaper.com, lists all the more than 900 companies that offer DRPs, information on getting started, and forms to get started.
Most Dividend Reinvestment Plans require investors to own a single share before enrolling. If you're not using a broker to buy that one share and put it in your name, there are other options, some of them listed here:
1. First Share, at 1-800-683-0743, links members with investors willing to sell a single share in a company. Members pay sellers market value plus $7.50. Membership is $18 a year, and First Share also charges $10 for each transaction. About 3,700 members hold shares in 300 companies. The program is meant for investors who want to enroll in at least three dividend reinvestment plans.
2. National Association of Investors Corp., at http://www.better-investing.org, is open to individual investors for a $39 annual membership. First single shares are available for about 160 companies. Stock purchase fee: $7 per company.
3. The Moneypaper, at 1-800-388-9993 and on the Web at http://www.moneypaper.com. First-time subscribers pay $40.50 for a year's subscription to this monthly newsletter, which also includes the full Directory to Dividend Reinvestment Plans. Subscribers can buy single shares of more than 900 companies. Stock purchase fee: $15 per company. $20 for non-subscribers.
(The complete services provided by The Moneypaper at reasonable prices is what made us decide to use the company for the Drip Portfolio. It's our choice alone. Foolishness is about making your own choices.)
(Please see the left navigation bar for information on this new portfolio.)
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