<THE DRIP PORTFOLIO>
by George Runkle (TMFRunkle)
Atlanta, GA (May 26, 1999) -- It occurred to me when I went on my recent trip to Japan that I may have a unique experience in finding a Japanese company suitable for us Drip investors. I wanted a company that would meet the Rule-Maker criteria and have a Drip ADR in the United States.
Before I go any further, let me explain how it works when you invest in a foreign company. For example, if you want to buy shares in Sony (NYSE: SNE) from the United States, you could probably open a brokerage account in Japan, but that would prove difficult. To make this process easier, many foreign companies trade right here in the United States through American Depository Receipts (ADRs). What exactly is an ADR?
An ADR is a receipt for a share of stock in that company's host country. Going back to Sony, if you own an ADR for 100 shares, you really have bought a receipt for 100 shares of stock in Sony that is held for you in Japan by a bank there. As an investor, the whole process is transparent to you. You receive annual reports, dividends, and all the other things that direct shareholders get. What we're interested in of course is Drips -- and many ADR's have Drip plans.
Sony, in particular, does. In fact, it has a direct purchase plan through Morgan Guaranty Trust Company (www.adr.com). For a minimum investment of $250, you can enroll and begin in Sony's plan. I did a quick search through NetstockDirect (www.netstock.com) for additional Japanese ADR Drips, and found Matsushita Electric Works, Ltd. (NYSE: MC), and NEC (Nasdaq: NIPNY) in short order.
Now, what I had planned do is look around and see what was the most commonly found brand in Japan. Then, if it had a U.S. Drip, I would check to see if it met the stringent Rule-Maker criteria. To save myself some effort, I also made sure I was only looking at companies with broad consumer appeal. No sense in trying Rule-Maker criteria on a Japanese shipbuilding company, because it probably wouldn't make the cut. I found two companies in Japan that met my criteria. One of them I knew met the Rule-Maker criteria, but Coca-Cola is an American company, so I was down to one: Sony.
Tonight as I went through Sony's annual report, I found it only rated a 3 out of a possible 14 on the Rule-Maker criteria. Why is this? Sony is carrying a lot of debt, has (relatively) low gross and net margins, and not much cash. I suspect Sony is having to compete heavily with other electronics manufacturers, which keep its pricing and thus margins low. Even without competition, Sony's pricing freedom is relatively low. People won't pay limitless prices for Walkmans, TVs, etc. The difference between paying 50 and 75 cents for a Coke isn't noticed as much as between 50 and 75 dollars for a Walkman. The percentage is the same, but the dollar amount scares people.
So, in the end, I haven't found a Japanese Drip yet. In the upcoming week I'll search around to see what else I can find. One reader suggested Nippon Telephone and Telegraph (NYSE: NTT). Next week we'll look at that company and see if it makes the cut.
Fools Wanted: Apply Within.