Motley Fool Staff
Sep 20, 1999 at 12:00AM
I proposed an initial list of companies, and several Fools were kind enough to send me more in e-mails and on the message boards. Some unfortunately didn't have Drips, such as Cisco Systems (Nasdaq: CSCO), so they had to be eliminated. I had to eliminate two on my initial list, Wal-Mart (NYSE: WMT) and Nokia (NYSE: NOK). While Wal-Mart has a website that you can shop from, that is not its primary business. Wal-Mart isn't a major force in bringing us together via telecommunications and the Internet. I also eliminated Nokia because there was a lack of data available from our Fool quotes area.
This brings me to the criteria I finally applied. First, the company has to be in telecommunications or make equipment for servers, LAN's, or connection to the Internet. Next, I went with five measures of finance and management effectiveness. They can be found on the Fool quotes area, so you don't have to rummage through financial reports. I also added a criterion based on Dripping fees. Finally, I assigned a point value to each criterion, based on my personal observations.
One of the most important criterion was return on equity, i.e., what I get back for the amount I own. Say I have a store, which is worth $800,000 in real estate. The store owes $300,000 in mortgages and other debt. How much return is that $500,000 in equity getting me? If it's not very high, that money needs to be invested elsewhere.
Sales growth over the last five years was the next criterion. I don't care what the analysts estimate because I'm a little cynical about their numbers, after Iomega's crash-and-burn and Coke's problems. All sorts of accounting tricks can make earnings per share (EPS) look high, so I want the company to "show me the money." I know -- past performance doesn't guarantee future results, but if a company made an increasing amount of money over the last five years, one can figure it could continue to do so.
Then came gross margin. This is sales minus cost of goods sold, divided by sales. How much is the company making off the sales? High gross margins allow more for research and development (R&D) and expansion. After that, it's "show me the money" time again. I want high net margins, which is the percentage that a company makes in earnings for each dollar sold. I know some businesses have traditionally low net margins. Someone else can invest in them.
Next came long-term debt divided by equity. Debt in itself is not a bad thing, but if I can get a company with high marks in the other criteria and with low debt, that's even better.
Finally, I weighed in fees. While I don't think Drip fees are that important, I have to admit that some companies are out of hand. Some want 5% on optional cash purchases, which is too high. I used the amount for a $100 automatic purchase to grade the companies, and while the possible point value wasn't that high, it was enough to be a deciding factor in close calls.
In the end, I had 13 companies in my spreadsheet. I came up with the high range of each point value by using the results of the top three companies in each criterion. The range for the middle three or four companies was assigned the middle point value, and the low range got zero. I put it all together and sorted the companies by point value. What came out? I put the spreadsheet for you to see in my personal website. Check it out here: http://www.mindspring.net/~grunkle/grossmargin.htm.
As you can see, the top three companies are Intel (Nasdaq: INTC), SBC Communications (NYSE: SBC), and Lucent Technologies (NYSE: LU). Before I go further, please let me know what you think, either by e-mail or in the Drip Companies message board. I'm looking forward to hearing from you.
Motley Fool Staff
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