Archive for Sunday, December 21, 2003

The Motley Fool

December 21, 2003


Last week's answer

I was founded in the South in 1962. I introduced pharmacy, auto service and jewelry divisions in 1978, and greeters and one-hour photo labs in 1983. I topped $1 billion in sales in 1979 and took in that much in a day in 2002. In 1983 I launched a club named after my founder. By 1985, I was running 882 stores, raking in $8 billion annually, and I employed more than 100,000 people. Two years later, my sales and employees had doubled. I expanded internationally in 1991, and today I'm the American company with the largest annual sales: $245 billion. Who am I? (Answer: Wal-Mart)

Lots to chew on at Yum

Yum! Brands (NYSE: YUM), owner of Taco Bell, Pizza Hut and KFC, recently reported a 10 percent increase in international sales in November (19 percent after conversion to U.S. dollars). The company forecasts annual overall sales increases of around 10 percent over the next three years.

But before you start salivating over the stock, note that it trades at a relatively steep price-to-earnings (P/E) ratio of 17. Why not look into Jack in the Box (NYSE: JBX), which is selling for 10 times earnings?

Furthermore, Yum!'s sales growth at stores open a year or more is projected at just 2 percent for 2004. Meanwhile, Wendy's (NYSE: WEN) is reporting sales up 9.4 percent, and McDonald's (NYSE: MCD) is delivering 10 percent sales growth.

You might choke when you see Yum!'s $2.1 billion in debt, though that's down from the $5 billion Yum! owed when it was spun off by PepsiCo (NYSE: PEP) in 1997. The company has the free cash flow to continue paying down its debt and expanding its business.

Outside America, sales are soaring. KFC is the most recognized international brand name in China. Yum! has the brands, the growth opportunities and the cash flow to aggressively fund international expansion -- and drive earnings higher. Still, buying shares now makes sense only if you think the company can significantly accelerate its earnings growth.

The wrong type

In August 1993, I listened to a financial commentator on a business program on television. He said, very excitedly, that Smith Corona was moving to Mexico and that he expected the stock to go through the roof. Since I owned Smith Corona products and saw many of them on shelves in stores, I purchased 100 shares. Shortly thereafter, they filed for Chapter 11 bankruptcy. My stock is now worthless and that commentator is no longer on the air. -- Eleanor Guenin, Boynton Beach, Fla.

The Fool Responds: It's smart to think of investing in companies whose products or services you use and admire. But look beyond that, to the company's financial health and its prospects for growth.

Does it carry a lot of debt and can it pay it off? If many of the company's products are on shelves, you might investigate how well they're selling. See how much dust is on them, perhaps, or talk to store employees. Investigate the competition, too -- are consumers snapping up alternate products or services? Smith Corona was hurt by the growing popularity of home and workplace computers.

How to figure gains on gifts

How do I determine my taxable gain when I sell shares of stock transferred to me by my parents? -- J.L., Ocala, Fla.

Your gain or loss 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 lower, 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. Check out IRS Publications 550 and 448 for more info. You can download them at

What does "held in street name" mean? -- R.M., Seymour, Ind.

Most brokerages hold stocks you buy in "street name" (i.e., their own name) instead of putting the shares in your name and mailing you the certificates. This is routine and the shares still belong to you. It's a good system for most people, as it means shares can be sold more quickly. You don't have to find and mail back the certificates to the brokerage. If you want the certificates, you may have to pay a fee.

Grab your 15 minutes of fame and ask a financial question of Fool co-founders David and Tom Gardner on The Motley Fool Radio Show on National Public Radio. Call anytime toll-free at (866) NPR-FOOL.

How to invest during retirement

Retirees often wonder, "Where should I invest my money so it's safe?" The traditional answer has been to invest retirement money in utilities, preferred stocks, REITs, bonds, and other dividend-producing, interest-paying securities. You would take the interest and dividends as income for the year and let the principal ride. The emphasis was on income, not on growing the base of the investment. Investing for growth meant taking more risk, and risk was to be avoided at all costs -- or at least so said the retirement advisers.

Times have changed, and the approach that once seemed so attractive and so sensible is no longer right for many people. Fewer companies promising dividend growth, the deregulation of utilities, increasingly volatile bond markets, low interest rates, inflation and increasing life spans have all undermined the security of a "low-risk, income-only" investment strategy for retirees. Many financial experts believe this strategy may actually endanger retirees -- you may run out of money before you run out of time to spend it. Not taking enough risk with your retirement money may represent the greatest risk of all.

For example, an all-bond portfolio with an average return of 6 percent might throw off enough income for a retiree today. But with a modest annual inflation rate of, say, 3 percent, every $1,000 produced by that portfolio will be worth only $554 in 20 years. Worse, the principal available then for reinvestment wouldn't have grown through the years. As purchasing power declines, a retiree using such a strategy almost certainly will have to dip into principal to sustain her lifestyle, and the use of that principal will definitely shorten the life of her portfolio. Conversely, an all-stock portfolio may produce growth from which one may take income. Yet stocks can plunge in value overnight, and they can stay down for five years or longer. To a retiree, that, too, can be a devastating result.

The solution to this quandary is asset allocation (more on that next week).

In the meantime, learn more about retirement investing in our how-to guides at and at

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