Buyin' Campbell
...our next investment in the Soup guy
by Jeff Fischer (TMFJeff@aol.com)


ALEXANDRIA, VA (Aug. 24, 1998) -- Today the Drip Port is sending $200 to Campbell Soup for a DRP investment that will be made within one week under the new and more flexible investment plan. The new plan invests optional cash payments as frequently as daily, rather than monthly. Yet, how and why are we sending $200 to Campbell? And perhaps you're also asking, "Why send any money at all?"

For many reasons.

Campbell is still the same company that it was when we decided to buy it in February. It has consistent share buybacks (2% of outstanding shares per year), management is reconfiguring its business to raise margins and focus on growth, it pays a dividend of 1.60% (the highest of our holdings), it dominates the soup market, it has the fastest-growing cracker in the United States (those tasty Goldfish), and its Pepperidge Farm cookies are perhaps the best that money can buy (that is, aside from Le Petit Ecolier -- it's difficult to top the French when it comes to cookies or pastries).

On top of all of that, Campbell Soup trades at 23 times 1999 earnings estimates for the fiscal year that begins in September, putting it at a reasonable valuation compared to the S&P 500 -- especially for such a strong brand leader in the consumer market. In fact, Campbell's management increased its share buyback when the stock traded in the high $40s this year, indicating that it sees enough value at those levels to voluntarily increase its purchasing of shares.

But, when it comes to us, what about the new DRP fees?

All aspects of the new Campbell DRP were implemented on July 29, except for the fees. The fees don't begin until September 14, so Fools can make free investments as frequently as they wish until that date. Following September 14, however, we won't likely be investing in Campbell for a long time due to the fees. So for now, we might as well send the most that we can, or about $200.

For a few months I've wondered why the Drip Port -- which has $286 in cash set aside for new investments and adds $100 per month for additional investment in current holdings -- doesn't invest the cash sitting in the account now and use the monthly addition to the portfolio to buy into new DRPs whenever that time comes. Readers have seen how long it can take us to announce a new buy (up to six months or longer), and there's no reason in the meantime to have 16% (and it used to be much higher) of the portfolio sitting out of the market in cash. It makes much more sense to invest all of our cash now and then use future monthly investments as needed to begin new DRPs, or, if not, to dollar-cost-average into existing holdings as usual.

So, due to our cash balance and because we only have three more weeks of a free Campbell DRP and the company is attractive to us for the long-term, we'll send $200 of our current $286 to Campbell today, leaving us with $86 until we add $100 on September 1. We're nearing a banking purchase decision, meaning that at least one-half of our $186 will be used for that and the enrollment fee, while the other half will likely be used to open a new food and beverage DRP in the near future. Then, most likely, with October's $100 addition we'll dollar-cost-average into our holdings again.

Now, about Campbell's new DRP...

Many Fools have complained about Campbell's DRP because it initiated fees. We'll address this concern with Campbell in the near future, but I don't believe that the new DRP merits outright anger. I disagree most with the fee to reinvest dividends, but used differently, the DRP is still the best means to buy Campbell Soup stock. What the plan is essentially telling people is: It's expensive for us to buy more stock for thousands of people every single month in small $25 to $50 amounts. If investors want to send such a little amount of money every month, there will be a substantial ($5) fee.

Rather than seeing this as an outright robbery, though, we might want to see the new plan as a catalyst for changing how we invest.

If you're investing for 20 years in a company, dollar-cost-averaging into the stock just once or twice a year in significant dollar amounts successfully averages you into the stock over time just as would sending very small dollar amounts every single month (at the expense of time and postage costs every month). I'm not defending the Campbell plan -- the fees are far too large if we were to continue investing a small amount each month. But, if we instead invest $250 once per year, the $5 free represents a 2% commission, or within the commission limit recommended by the Fool. And, importantly, the fee is still lower than any discount broker that I've seen. So, if you invest $250 (or more) just once or twice a year, you're still buying the stock through the most economic means possible and you're still dollar-cost-averaging significantly enough considering a twenty-year holding period.

The new plan is essentially asking investors to approach the DRP differently. That's how I've come to see it. Don't assume that just because you've sent $50 to Campbell every month that you always need to invest monthly and in a small amount, and now you can't invest because there's a $5 fee each time. Instead, consider investing differently. You save ten checks and ten stamps a year (and how much time?) if you only invest in Campbell twice annually rather than once a month (ten skipped months represents $3.20 in postage savings -- not a bad chunk of the $10 investment fee that you pay if you invest twice per year). Consider it a DRP that's even more slow-going and long-term than your usual DRP, and invest in it if you can't get a lower commission rate from any discount broker.

That said, I don't know that the Drip Port will indeed invest at least $250 in Campbell once a year. A problem for us is that we'd need to save for 2 1/2 months to do so. Most Fools in the world are able to invest a lump sum once or a twice a year, but it takes work for the Drip Port. So, we may not never invest in Campbell again -- but that doesn't mean that other Fools shouldn't consider it, of course.

No matter what we do, the least forgivable part of the new DRP are the fees for reinvesting dividends. Being charged a fee for doing the very thing that these plans are designed for is like being charged extra for an actual seat on a train when you've already bought the train ticket to ride.

We'll discuss the importance of dividends tomorrow and what we might do with Campbell's rather than reinvest them and pay the 5% reinvestment fee (up to $3). The company allows for dividend payments to be received by check or electronically (automatic deposits) rather than being reinvested. We might accept the dividend in this way and roll it into a DRP that doesn't have fees. We'll also rally against this fee with Campbell.

So, $200 is being sent today.

Fool on!

--Jeff Fischer

FoolWatch -- It's what's going on at the Fool today.


8/24 Close

Stock Close Change CPB $52 7/16 +5/16 INTC $84 5/8 -5/16 JNJ $76 9/16 +7/16
Day Month Year History Drip 0.13% (0.38%) 11.93% (4.68%) S&P 500 0.64% (2.90%) 12.13% 14.38% Nasdaq (0.32%) (4.36%) 14.04% 12.36% Last Rec'd Total # Security In At Current 08/03/98 4.125 CPB $54.395 $52.438 07/01/98 9.724 INTC $80.239 $84.625 08/07/98 6.543 JNJ $70.138 $76.750 Last Rec'd Total # Security In At Value Change 08/03/98 4.125 CPB $224.38 $216.30 ($8.08) 07/01/98 9.724 INTC $780.21 $822.85 $42.64 08/07/98 6.543 JNJ $458.92 $502.18 $43.26 Base: $1800.00 Cash: $286.03** Total: $1827.36

The Drip Portfolio has been divided into 76.682 shares with an average purchase price of $23.474 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
8/24/98: sent $200 to buy more CPB.