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Archive for Sunday, August 17, 2003

The Motley Fool

August 17, 2003

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Last week's answer

You may not know my name or how to spell it, but I'm a global giant in the wine, spirits and fast-food spheres. My brands include Kahlua, Stolichnaya Vodkas, Sauza Tequilas, Beefeater, Malibu rum, Canadian Club, Courvoisier, Maker's Mark, Midori, Hiram Walker Liqueurs, Buena Vista, William Hill Wines, Clos Du Bois, Atlas Peak, Dunkin' Donuts, Baskin-Robbins and Togo's. I sell more than 20 million cases of spirits annually and more than 4 million doughnuts daily. Based in the United Kingdom, I'm the world's No. 2 distiller and sport about 10,000 food outlets internationally. Who am I? (Answer: Allied Domecq)

ABCs of IPOs

When a company needs money, it can do several things, such as borrowing from a bank or wealthy investor, or issuing bonds. Another option is to sell off a chunk of itself to the public, via an initial public offering.

Investors often work themselves into a frenzy when a highly regarded company first issues shares of itself on the stock market. This causes the new stock's price to skyrocket, further fueling the public's interest in IPOs. Some high-profile IPOs you might remember include those of Netscape in 1995, Amazon.com in 1997 and UPS in 1999.

Most individual investors can't buy shares of "hot" IPOs at their initial prices. For starters, not all brokerages are allocated shares. The big clients of the underwriting investment banks -- such as pension funds, mutual funds, other corporations and high-net-worth individuals -- get a first shot at the shares. (If a broker offers you IPO shares and you're not a major client, the big players must not have much interest in them and perhaps you shouldn't, either.)

There are many reasons why Fools should avoid IPOs:

  • They tend to be much more volatile than other stocks.
  • Most are young companies, with unproven operating histories. It's best to let a firm get a few quarters under its belt before investing.
  • IPOs often underperform. Finance professors Tim Loughran and Jay R. Ritter examined the performance of 4,753 IPOs between 1970 and 1990 and found that in the five years following the offering, the average annual return for IPOs was 5.1 percent vs. 11.8 percent for comparable firms.

Though many IPOs do surge in value in their first days, others don't. The much-hyped high-fliers usually descend, permitting us to buy when the shares are priced closer to their fair value. Consider Internet company iVillage, which traded in the $70s on its first day in 1999, hit $130 per share a few weeks later, and is now a struggling penny stock.

There are many promising companies out there with established track records. Think twice before scrambling to get a piece of an IPO.

The dividend edge

Am I right in thinking that stocks that pay dividends perform more poorly than stocks that don't pay them? -- P.D.F., Seattle

Probably not. Some studies have shown that firms that pay out a higher percentage of their earnings as dividends increase their earnings faster, and that in the past five years, companies that regularly hiked their dividends tended to perform much better than the market average. Dividends are attractive because they offer a (mostly) definite return, and they're now receiving more favorable tax treatment.

What are some ways I can find extra money to invest? -- I.R., Chicago

If you're a homeowner and you haven't refinanced your mortgage yet, consider doing so. As long as you'll be staying in your home long enough to have your monthly mortgage payment savings cover the refinancing closing costs, you can come out ahead.

Then spend some money to make money -- by paying down your credit card debt. Negotiate with your lenders to lower your interest rate to 12 percent or less, and be diligent about paying off as much as you can each month. If you don't carry credit card debt, good for you -- you can make some money via cards that pay you some cash back.

Also, get rid of costly items you don't use, such as extra cell phones, magazines, a gym membership or the extra cable box for that basement TV you never watch. Try selling stuff you don't need on eBay.

As part of The Motley Fool's 10th anniversary celebrations, we've assembled "10 Ways to Save Money Now." Check them out at www.fool.com/features/themes/2003/030801tenways.htm. You can also learn more about refinancing at www.smartmoney.com/home and about credit card deals at www.cardweb.com.

Procter & Gamble delivers with new products

Procter & Gamble (NYSE: PG) closed out its fiscal year recently with higher sales and earnings as new products helped the consumer products giant grow.

Total revenues increased 7 percent to $11 billion, with more than half of that jump stemming from currency effects, with the weak dollar boosting overseas sales.

P&G's number of units of product sold rose 5 percent, boosted by double-digit gains from its health-care products division.

For the fourth quarter, P&G earned $955 million, 5 percent above the year-ago quarter's $910 million.

Not counting restructuring expenses, earnings increased by 12 percent quarter over quarter.

P&G continues to benefit from our obsession with white teeth. The company's Crest Whitestrips and new Crest Night Effects whitener drove the health-care products' 18 percent unit volume growth. P&G has been tinkering with pricing to counter Colgate-Palmolive's (NYSE: CL) Simply White brush-on gel.

P&G is kicking butt against Kimberly-Clark (NYSE: KMB) in the diapers market. Last week, Kimberly-Clark reported lower quarterly income and diaper sales volumes. Procter & Gamble's baby and family care division, on the other hand, returned 6 percent gains in unit sales, with Western Europe and Asia experiencing double-digit growth.

Bottom line: Procter & Gamble continues to execute and is proving to be an adept competitor. During this past fiscal year, excluding restructuring expenses, earnings grew 14 percent and management looks for more double-digit earnings growth next year.

Investor receives cold tip on a penny stock

A few years ago, a "trusted broker" recommended Country Star Restaurants to a friend of mine when it was trading around 70 cents per share. A bunch of us all bought in because he really talked the stock up, indicating that it would hit $2 a share. We bought then and kept buying, all the way down until the stock hit 6 cents per share. It then executed a 10-for-1 reverse split, reducing our number of shares by 90 percent, and then resumed dropping. We eventually realized that penny stocks are a one-way ticket to the poorhouse! -- Jeff Kowalczyk, Alsip, Ill.

The Fool Responds: Right you are, Jeff! Most such stocks are trading for pennies for a reason -- sensible investors have no interest in them.

These penny stocks, which can trade for up to $5 or so per share, tend to be unstable, unproven and volatile, and are especially vulnerable to manipulation by scam artists. (And reverse splits are often a harbinger of danger.)

The Securities and Exchange Commission offers some guidance and warnings about these stocks at www.sec.gov/ investor/pubs/microcapstock.htm.

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