Drip
Portfolio Report
Thursday, January 8, 1998
by Randy Befumo
([email protected])
ALEXANDRIA, VA (Jan. 8, 1998) -- Having toured the message boards to see what readers are thinking about our pending food selection, a very preliminary analysis reveals that Drip readers favor Campbell Soup (NYSE: CPB), Coca-Cola (NYSE: KO), and Philip Morris (NYSE: MO) by a wide margin. Tier-two favorites include General Mills (NYSE: GIS), PepsiCo (NYSE: PEP), and Anheuser Busch (NYSE: BUD). There is good conversation on the topic out there on the message boards, so readers who want to get a sense of what others think should head on over and check out the ongoing dialog today. (In the "DRIP -- Companies" board.)
One company that also received numerous favorable mentions but that we unfortunately will not be able to Drip into is Tootsie Roll (NYSE: TR). For some bizarre reason that we have yet to figured out, in the delirium of a very late Saturday night working on the Branded Food spreadsheet, I asked Jeff if Tootsie Roll was in the Big Book of Dividend Reinvestment Plans (a.k.a. the Moneypaper Guide to Dividend Reinvestment Plans). The enervated and overworked co-portfolio manager friend of mine apparently hallucinated, as he said "Yes!" quite emphatically. (If you were there, you would agree.) To make a long story short, it turns out that Tootsie Roll does not have a DRP plan. Thus, the great Tootsie Roll Tease of '98 has been perpetrated on you, our unsuspecting readership. Sorry. (Anyone upset about this should e-mail Jeff, not me.)
With that admission out of the way, I am now free to explain how I am going to evaluate these companies. Enterprise value-to-sales, operating margin, and debt-to-sales are all important to me in the analysis. Enterprise value-to-sales and operating margins give me a sense of how the company is valued relative to the margins it generates, while debt lets me know what sort of leverage has been employed to generate returns. The dividend yield is also important to me, as capturing and reinvesting dividends over a long period of time will have a powerful effect on total returns.
I am not really looking at P/Es, PEGs, and YPEGs too closely for these companies given the degree to which the earnings they report are affected by non-cash charges like amortization and depreciation. You see, when one company acquires another, some funny accounting can go on. The difference between the price paid and the current shareholder's equity (book value) is called goodwill and goes onto the balance sheet of the acquiring company as amortization. This amortization is then deducted from earnings over multiple years to reflect the long-term impact of the purchase. However, given that the company was paid for when it was acquired, this accounting policy actually causes the company to understate earnings because the amortization cost is non-cash. As food companies make a lot of acquisitions, it is much more useful to look at accounting earnings plus amortization rather than just looking at reported earnings.
Based on value relative to sales, operating margins, debt-to-sales, and dividend yield, my favorites in the bunch are Philip Morris, Campbell Soup, and Interstate Bakeries. Philip Morris is just absolutely cheap with a very high yield, while Campbell Soup and Interstate Bakeries have improving margins and are relatively inexpensive relative to the degree of improvement that is possible. Although not reflected in the full year results, based on the last quarter results I also like PepsiCo and Quaker Oats. Both companies seem to have substantial room to improve results, and I would like to look at them more closely over the next week. Jeff will give his five favorites tomorrow and we will then get to the picking next week.
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