ALEXANDRIA, VA (Oct. 2, 1998) --I find the stock market incredibly enjoyable, and the Drip Port in particular, because I understand and I like what we own. I also understand and am comfortable with our stocks' valuations. Plus, when prices decline I like them even more, and I always look forward to sending the monthly checks and to receiving the monthly statements showing our buy prices and our cumulative shares -- watching our accounts grow. (By the way, $100 was sent to Johnson & Johnson this week.)
It seems only yesterday we began with $500 and no investments. Now the Drip Port has a base of $2,000 and is invested in three stocks -- soon to be four. Four seems almost too many to me after a mere 15 months. We paid $60 in fees to buy those four stocks. I currently don't feel any rush to buy more companies when we already own companies that we like and can invest in every month at absolutely zero cost. We have 19 years to find other investments and we're going to become even more particular in what we buy. We aren't going to over-diversify. Transaction costs become substantial. We want to minimize them.
Still, knowing that it takes us several months to learn about and analyze an industry and the companies in it while looking for an exceptional investment, we'll soon begin another industry study after we hear from you. What do you want to study? After reading this column, please post on the Drip Companies and Investments message board which industry you want to study together next and, if you can, which companies in the industry should be the focus. We'll compile the suggestions at the end of next week (giving everyone plenty of time) to determine which industry is next.
In the meantime, there is one exceptional company that I'd consider beginning to DRP with now. It's a no-brainer except for its valuation, which should be considered. Coca-Cola (NYSE: KO) is now 34% below its high, although even at this price it trades at 37 times 1998 earnings per share estimates and 33 times '99 estimates (estimates which seem aggressive given the world situation). Plus, on cashflow Coca-Cola is still one of the more expensive companies on the market (however deservingly so).
But it's on my mind. After the initial fee (ouch), the Coca-Cola DRP would be free and, of course, additional investments are entirely optional. We would be in a position to take advantage of swoons in Coca-Cola's stock price, buying shares only during improved opportunities. In that way, we could still hope to beat the stock market with this aggressively-priced company that isn't growing right now -- in fact, shareholder value has not been created at Coca-Cola for nearly two years, and DRP investors over that time have actually suffered a loss of capital. Having sunk money into the stock at higher prices for the past 22 months, imagine if instead these investors could now sink all of that money into Coca-Cola at these prices? The "time to return" equation on those dollars would be so much better (and the dividend yield locked in would be higher, too).
Coca-Cola: even it has a price if you want to achieve good returns from the start.
Knowing that Coca-Cola is at least on our minds here at the Drip Port, let's talk Campbell Soup (NYSE: CPB). With 90% of operating earnings derived domestically, the company is faring the international crisis much better than most. It actually grew earnings per share 16% this fiscal year while Coca-Cola, Gillette and other multi-nationals are falling far short of estimates. (Coke will probably post a 3% decline in earnings this year.) The current issue that we have with Campbell, however, is the dividend reinvestment fee.
Speaking with First Chicago Trust Company (Campbell's transfer agent), you can cancel your dividend reinvestments with Campbell and receive a check every quarter instead. You need to call them (see your latest DRP statement) and request the form.
In our case, we'd get a check for $1.68 each quarter -- we receive $0.84 per share in annual dividends and own 8 shares. If we instead reinvested that $1.68 in Campbell and paid the 5% dividend revinvestment fee, we'd pay $0.084 in quarterly fees. Eight cents. So it actually would come to about $0.33 per year in fees. Believe it or not, we pay that sort of fee with our other companies, too -- in "brokerage and other commissions" that are shouldered by DRP participants, as you can see on your JNJ statement, or a Coca-Cola statement.
So the question of the hour is: do we reinvest our $6.72 per year of dividends from Campbell that we'll receive and pay the $0.33 fee each year, or do we cancel the reinvestment, receive a check every three months for $1.68, take the check to the bank, deposit it, and take the time to roll it (hopefully?) into another dividend reinvestment plan? Let's see -- that $0.33 fee growing at 12% annually for 20 years becomes $2.89. In twenty years, that'll hardly buy a stamp. But that's just one year's fee.
If we avoided the annual fee of $0.33 in 1999, 2000, and so on, and instead invested that savings in another stock and it grew 12% annually, we'd have saved $6.60 after 20 years and it would have compounded to a value of around $30 total by 2018.
Let's say it takes 10 minutes per quarter to receive the check and get it to the bank for deposit (and then to later keep record of it and pay it to another DRP). That's a reasonable estimate of time (conservative, really). Ten minutes per quarter is 40 minutes per year, just to save $0.33. It takes you 40 minutes a year, or 800 minutes for 20 years, or 13.3 hours. All that for a possible ending pool of $30 (coming from $6.60 in fees saved, invested at 12%). Thirteen hours for $30. That's $2.25 an hour that you're essentially paying yourself.
In other words, it's not worth it for us. You can cancel your dividend reinvestment with Campbell Soup and save the $0.33 per year in fees and deal with the quarterly check that you'll receive, but for now the Drip Port is going to continue its reinvestment with Campbell and pay the fee, which will be deducted from taxes anyway. And again, the fee is not much different from the ones already charged (though not nearly so visibly) by our other DRPs.
However, one point: The fact that the Campbell reinvestment fee is 5% of the dividend is a shame, because that's well above the maximum commission that we hope to pay for any transaction. But the absolute dollar amount is still almost meaningless. Instead of dealing with four checks per year for 20 years to save $6.60 -- $6.60 that would become perhaps $30 if compounded over that time -- try saving $30 some other way right now. Next time that you go out to eat, don't buy that bottle of wine, and instead invest the $30 that you save right now. Compounding at 12%, it'll be worth nearly $300 in 20 years, and you'll save 20 years of hassle with tiny checks.
There are many ways to save $0.33 per year. Having to take the time to cash four checks for $1.68 apiece is arguably not the best way.
To conclude: Our quality of life at the Drip Port is best served by having the Campbell dividend reinvested (at least for now -- if the dividend grows handily and the reinvestment fee becomes too substantial by dollar amount, we'll cancel the reinvestment). You are free, of course, to request a check and roll the Campbell dividend into another company as we discussed a few weeks ago. But the Drip Port has opted not to for now. Our action on Campbell's dividend: change nothing now, just let it reinvest.
By the way, Brian (TMF Panic) is working to arrange an interview for us with an executive from First Chicago Trust Company of New York in order to discuss DRPs and fees. We'll know much more next week.
Touchstone Friday. Speaking of Brian, he wrote four great Drip Port columns this week -- all very enjoyable and Foolish. Brian is preparing to invest in DRPs himself, and he'll be joining us for our next industry study. This week on Monday he wrote about when a Fool should invest, and Tuesday he wrote about all of us having time. Wednesday's column was on investing and home run hitting -- a must read for all the aggressive investors you know who are always throwing good money after bad at the next "big thing," a thing which rarely pans out. On Thursday, Brian concluded with a Foolish Fable.
Don't forget to vote for your preferred industry! The Drip message boards are linked to at the top right of this page.