Name That Company

I was born in 1932 in New York as the Baumritter & Co. housewares distributor. My name later changed to reflect the commander of the Green Mountain Boys in the Revolutionary era. In 1999 I introduced my Kids Collection. Beginning in 2000, consumers could order my offerings online. Today, I have more than 310 outlets around the world. I employ more than 5,000 craftspeople and operate 17 plants and three sawmills. Roughly 90 percent of my products are made in the United States, and nearly 100 percent of Americans are aware of my brand. “Everyone’s at home” with me. Who am I? (Answer: Ethan Allen)

Paychex checkup

Payroll specialist Paychex (Nasdaq: PAYX) recently capped a difficult but successful year by announcing solid fourth-quarter results. Net income was up 8 percent over last year, to $275 million, while revenues rose 10 percent, to $955 million. And this was during a year in which interest rates were lowered many times, clients’ payrolls dwindled due to layoffs, and new companies seeking services weren’t plentiful.

Paychex’s service revenues continue to grow, with these services including payroll, human resource and employee benefit services. The gain is the result of additional clients (demonstrating Paychex’s marketing abilities), more sales of ancillary new services (reflecting the company’s innovation and execution), and price increases (evidence that Paychex has pricing power). This three-pronged growth strategy has worked for years at Paychex, and should continue to work, making even sharp economic downturns less harrowing.

In addition, the company’s profit margins have held up under fire, reflecting the fact that Paychex is not a capital-intensive business. Finally, understand that Paychex earns significant interest on funds withheld from client payrolls (called “float”). When interest rates start to rise again (and eventually they will), Paychex should benefit from higher income and, possibly, even higher margins.

With its price-to-earnings (P/E) ratio recently having fallen near 30, the stock is still not exactly cheap. It’s well worth keeping an eye on, though.

Pennies for my thought

I’m a member of the sad club of investors who allowed greed to get the better of them by taking a flyer on a penny stock. In 1999, I bought 500 shares of ebaseOne Corp. at a little under $1 a share. Why did I buy, you ask? Had I done a lot of research? Nope. The company simply announced some relationship with powerhouse Cisco Systems, so I figured I couldn’t lose. As I watched it climb to almost $20 per share, I was convinced that I had outsmarted the penny stock gods and had found a diamond in the rough. Unfortunately, in short order I was left with shares trading for mere pennies apiece. In retrospect, I think I was duped by a pump-and-dump scam (where manipulators hype a company and then sell their shares before it crashes), and then compounded the error by not getting out once the stock collapsed. If I didn’t believe it before, then I definitely believe it now: Stay away from penny stocks. J.P., North Carolina

The Fool Responds: Amen.

Good will

Why does good will show up as an asset on the balance sheet? Pete Murphy, Pioneer, Calif.

Good will is generated when a company acquires another firm and pays more than the acquiree’s net worth, as measured by book value. Imagine that BEANZ Burritos (ticker: BEANZ) acquires CHEEZ Enchiladas (ticker: CHEEZ). If BEANZ offers just the book value of CHEEZ, that might trigger counterbids from other companies that think CHEEZ is worth more. So BEANZ pays a premium. This difference between the price paid and the book value of the acquiree is entered onto the acquirer’s balance sheet as “good will.”

Let’s say the book value of BEANZ was $100 million before the acquisition. CHEEZ was calculated to be worth $20 million, but BEANZ paid $25 million in cash. BEANZ’s value won’t change. It will still be worth $100 million. But it will now have $25 million less in cash, a $20 million CHEEZ division, and $5 million in “good will.”

To understand why good will is counted as an asset, remember that an acquirer shouldn’t be paying more for a company than it thinks the company is ultimately worth. An acquiree may have few tangible assets that show up as book value, but lots of brand power and proprietary knowledge. Those assets get recorded as good will.

401(k) vs. Roth IRA

Don’t assume that your single best bet for retirement savings is your 401(k), 403(b) or 457 plan. In a recent BusinessWeek article, economists Laurence J. Kotlikoff and Jagadeesh Gokhale claim that many investors would have more money in retirement if they contributed to accounts other than 401(k)s. That’s because withdrawals from 401(k) accounts are taxed as ordinary income, instead of at the lower capital gains rates for long-term holdings. This can also push retirees into a higher tax bracket.

If your employer matches your retirement plan contributions, you should contribute at least as much to take full advantage of that free money, according to Kotlikoff and Gokhale. After that, you’re probably better off putting your next dollars in a Roth IRA, if you’re eligible, to the maximum allowed. (If your employer doesn’t offer a match, you might contribute the maximum amount to a Roth IRA before even considering another option.)

Here are two other Roth benefits:

Assets in an employer-sponsored plan (and in a traditional IRA, for that matter) must start being distributed by the time the account owner turns 70 1/2, whether the money is needed or not. The account owner loses the benefit of tax-deferral on money withdrawn. With a Roth IRA, however, if the money is not needed, it can continue to bask in the glow of tax-free growth, no matter how old you get.

Withdrawals from work plans and traditional IRAs before the account owner is age 59 1/2 result in immediate taxation and a 10 percent penalty. Some plans allow participants to borrow from their plans, but many don’t. Contributions to (but not earnings in) a Roth IRA may be withdrawn anytime, penalty- and tax-free. The same can be said of earnings withdrawn for first-time home purchases as long as the money has been in the account for at least five tax years. We don’t necessarily recommend this, but if you need the money, it’s there.

Of course, everyone’s situation is different. Learn more at www.fool.com/retirement.htm or www.irs.gov, or ask a financial adviser.