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Archive for Sunday, July 15, 2001

The Motley Fool

July 15, 2001

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Name that company

I was born in 1969 in San Francisco, and today I rake in more than $13 billion annually. I operate more than 3,800 stores in North America, Europe and Japan. My three main brands are named for a space, an aged armed force and a fruity government. My baby was born in 1990. My employees number more than 165,000, and some say I helped renew interest in swing dancing. My stock has advanced more than 600 percent over the past decade. Who am I? (Answer: Gap)

Know the answer to the trivia question on page 1E? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investment (up to 100 words), and your Trivia entries to Fool@foolcom.

The payout ratio

Q: What's a company's "payout ratio"? W.I., Brevard, N.C.

A: It's the percentage of net income the firm pays out to shareholders as a dividend. If Farm Dogs Inc. (ticker: BINGO) pays $1 per year in dividends and earns $4 per share, its payout ratio is 25 percent.

When a firm returns much of its earnings to shareholders, then little is being reinvested in operations. That's not necessarily bad, though. Sometimes reinvested earnings would return less than shareholders could get investing the payout on their own.

Q: My parents have transferred shares of stock to me at various times in the past. How do I determine my gain or loss when I sell them? Mary Ann Woytus, via e-mail

A: Your gain (or loss) on the sale will depend on the price at which you sell the stock and your cost basis in the stock. To determine your cost basis, you need to know at least two things: your parents' cost basis for the stock and the fair market value (FMV) of the stock at the date of the gift.

If the FMV of the stock is more than your parents' basis at the time of the gift, then your basis is the same as your parents' basis. If the FMV is less than your parents' basis, then things get more complicated. Your basis is "probably" the FMV on the day of the gift. It depends on the price of the shares when they are sold.

There's more to this issue. You might want to read IRS Publications 550 and 448. The IRS Web site at www.irs.gov is a handy place where you can download and print forms.

Win-win

My grandfather bought some shares of Brown-Forman (one of the nation's largest wine and spirits enterprises) during the Depression. He said, "When times are bad, people drink." Of course, they also drink when times are good it's a win-win situation.

I bought 10 shares in 1975 for $10 each. I never bought any more shares, but started reinvesting my dividends into additional shares about 13 years ago. Two years ago I gave 10 shares to each of my eight nieces and nephews and I still have 109 shares. Now several of them are snapping up more shares of their own. I love this stock. Mary Ann Brodersen, St. Petersburg, Fla.

The Fool Responds: Your family has exhibited some smart thinking. Recession-resistant industries can make for solid investments. (Industries such as pharmaceuticals and food can be even more resilient.) Holding on for the long haul also was smart, as was having your dividends reinvested.

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