The Future of DRPs
Online we will go

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Oct. 6, 1998) -- Yesterday we spoke with Mr. James Volpe, Vice President of First Chicago Trust Company of New York. Mr. Volpe is, for one, responsible for developing and maintaining First Chicago's dividend reinvestment and direct purchase programs. First Chicago is a heavyweight in the industry, being the transfer agent for over 400 companies including Coca-Cola, Pfizer and Johnson & Johnson.

When a company wants to offer a DRP or direct purchase plan, it ether needs to spend an average of $250,000 in legal fees alone to get one started independently, or it can utilize an accepted plan that is already in place and approved by the SEC. First Chicago Trust spent over $1.5 million composing a No Action Letter in 1994 that instituted its DRP programs as readily available models for any interested company to use. In this way, a company can begin a DRP using First Chicago's approved model(s) with ease and little cost.

The two main formats for DRPs are "registered plans" and "bank plans," and a company can not make a profit from shareholders using either one. With any DRP, a company won't make money; often it will absorb a small loss while aiming to be cost neutral. Before our interview, many readers wanted to know who made money on the fees charged in some DRPs, and why some companies have fees and others don't.

The administrator of a plan aims to make a slight profit for its work, whether that be through fees paid by shareholders or by the company if the company chooses to absorb all of the fees. The administrator is in a tight place of sorts (and has very slim profit margins) because the companies that it represents want their plans to be high-quality but as inexpensive as possible for both their shareholders and for the company. If the company doesn't want shareholders to carry any cost of the plan, they will stomach the fees and the annual "carrying cost" that the administrator must charge in hopes of not only breaking even, but achieving a small profit. (First Chicago is, after all -- as are all banks and transfer agents -- a "for profit" organization.)

Mr. Volpe at First Chicago does expect more DRPs to begin to have low fees in the future for a few reasons. Companies want to continue to offer the plans because the benefits for shareholders (and companies) are obvious, but company management is increasingly being pressured to lower costs -- all costs. And shareholders that are not enrolled in a DRP (and that's usually a majority of them) question why they should shoulder the cost for those that are in the DRP, while those in the DRP are getting the program for free. (There's no free lunch. Someone down the line pays for someone else's otherwise free DRP.)

For shareholders in general, it costs a company $15 to $20 per year to carry them (through mailings of proxies, annual reports, keeping of shareholder records, and so forth). A DRP is an added service and added expense beyond that. Later this week, Brian (TMF Panic) -- who set up and participated in the interview with Mr. Volpe -- is going to write about how shareholders can work to lower the cost that they represent to companies (for example, reading the annual report online and not requesting the hardcopy).

Anyway, many companies, as we know, choose to cover the cost of their DRPs and they have so many shareholders in the programs that they'll likely continue to do so. Coca-Cola, for example, likely falls into this category, as does hopefully Johnson & Johnson. Exxon is also often mentioned as offering an excellent free direct purchase plan. There are many. But we shouldn't be surprised to see more companies begin to offer more services and, at the same time, begin to charge small fees to cover their costs. That's what they're being pressured to do: cover costs, but not profit (they can't legally profit). Only the transfer agent of course needs to make a small profit and how they make that profit is up to the company -- through the shareholders or by the company paying. (One reader asked how plans get decided upon: First Chicago offers options to companies based on what sort of plan they want to implement. It is entirely the company's decision which format they use, of course.)

One way that plans are becoming more efficient is by taking advantage of the Internet. In fact, "online" is the direction these plans are going, and First Chicago is pushing the programs in this direction for everyone's benefit. We can now see this first-hand with one of our holdings, Johnson & Johnson (NYSE: JNJ), whose DRP is rolling online along with the following list that Mr. Volpe mailed to us today. Mr. Volpe's words follow:

"We are the first transfer agent to offer Internet proxy voting, Secure Internet access for shareholders to their account information, Internet delivery of annual reports, Internet proxy delivery/voting. Additional functions such as purchase/sell/change [meaning, change your policy preferences] will roll out in phases."

Further, Mr. Volpe indicated that the following companies now offer Internet access to shareholders:

Associates
Ford Motor Company
Aeroquip
Calgon Carbon
Dayton Hudson
Eastman Chemical
Fannie Mae
Goodyear
Ohio Casualty
Old Republic
American Electric Power
Unicom
Johnson & Johnson
Keithly Instruments
Meritor
RJR Nabisco
United Technologies
McDonalds
Browing Ferris

Other companies by the end of October:

Ecolabs
IBM
Best Foods
CPC
Saul Centers

Mr. Volpe then wrote in an email: "This is a Motley Fool exclusive by the way -- this is really new stuff!"

It's exciting, too, in my opinion. Essentially, as he said over the phone yesterday, DRP investors will be able to keep track of their DRP portfolios online, and do everything they need to (buy/sell/reinvest or not) with a click of their mouse. (Moving all of your banking online is beginning to make more and more sense. Hey, Mellon!)

The information about these plans can be found at http://www.fctc.com. I'm going to visit tonight to see how our Johnson & Johnson account appears.

As for fees: We'll continue to, of course, covet those plans that are free to shareholders (and free plans are offered, thankfully, by hundreds of great companies!), but we'll also continue to invest based on a company's merits more than whether or not it charges a $1 fee to invest optional cash. (By the way, one of the problems with using electronic bank payments -- or Automatic Cash Payments -- to buy shares in DRPs is that they require you to do so each month. First Chicago is working to make this optional -- meaning, you could invest electronically through the bank at your leisure, and for only a $1 fee. That would often be worth it, in my mind, rather than sending a check through the mail.)

Anyway, we want our DRPs to remain free (and we will encourage companies like J&J, Pfizer and Coca-Cola to continue the course with their current plans), but it's necessary and Foolish to understand why some companies do have slight fees. They're not making money on you. They're trying to break-even. While doing so, they still offer a great program that beats traditional brokers, even if it means you might have to change your investing habits with them to make them more cost effective.

For example, I received an email today from an investor who previously sent $100 to Campbell Soup (NYSE: CPB) every month. Now, instead, he'll send $1,200 just once a year. His fee will be $5 for that investment (better than with any broker), and in the process he saves eleven checks and eleven stamps, or about $3.50. And by next year, he'll likely be able to make his investment electronically for only $1.00. You can't beat that.

These plans continue to be attractive and the direction they're going won't change that. At most, we might change how we use some plans in a few instances. But DRPs are still the most attractive way that I know of for the majority of the world to invest, especially because most Americans are able to, at most, sock away only a modest amount of money every month. DRPs make the most sense for them when investing. Plus, the online aspect of DRPs will make them even more attractive, and probably more affordable for everyone.

Finally on the interview topic: One Fool asked how the BankBoston and First Chicago deal will change things. It really shouldn't. The companies will continue to operate much as is.

We'll continue to discuss this topic in the days ahead, of course, as well as address more changes and improvements that are coming to DRPs. Overall, the changes are positive. And many, many leading companies will likely continue to cover DRP fees for life. For more discussion, please visit the message boards linked in the top right of this page. And also, don't forget to please post which industry you'd like us to study next on the Drip Companies message board.

Fool on!

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10/06/98 Close

Stock Close Change CPB $56 1/16 +1 5/16 INTC $79 5/8 -15/16 JNJ $79 9/16 +1/8
Day Month Year History Drip 0.47% 0.06% 12.12% (4.52%) S&P 500 (0.05%) (2.85%) 1.81% 3.86% Nasdaq (1.68%) (10.80%) (3.79%) (5.21%) Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $56.250 09/01/98 9.727 INTC $80.238 $80.188 09/08/98 6.564 JNJ $70.161 $79.625 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $451.52 $27.16 09/01/98 9.727 INTC $780.50 $780.01 ($0.49) 09/08/98 6.564 JNJ $460.54 $522.66 $62.12 Base: $2000.00 Cash: $286.07** Total: $2040.26

The Drip Portfolio has been divided into 85.474 shares with an average purchase price of $23.399 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:
9/21/98: Sent $77 to buy/enroll in MEL. 9/30/98: Sent $100 to buy more JNJ.