Name That Company

I was born in 1978 in Georgia, and a year later my three stores racked up $7 million in sales. Today I operate 1,473 stores in the United States, Canada, Puerto Rico and Mexico. My annual sales top $50 billion. My stores often sport more than 130,000 square feet, and contain around 45,000 kinds of products. I employ more than 280,000 people, matching the population of Iceland. In 1999 I opened a museum chronicling my history. Fortune magazine has named me one of America’s most admired companies several times. Call me the domicile station. Who am I?

Know the answer? Send it to us with Foolish Trivia on the top and you’ll be entered into a drawing for a nifty prize! The Journal-World’s address is P.O. Box 888, Lawrence, Kan. 66044. Last week’s answer: Home Depot

Dell’s not-so-small business

Dell Computer (Nasdaq: DELL) is launching a new batch of services to help small businesses network their computers effectively. It will provide everything mom-and-pops could want: hardware, software, training and installation.

According to a report by AMI Partners, an estimated 70 percent of small businesses have no information technology (IT) department. That’s a sizable market opportunity for Dell. Non-techie business owners in doctors offices and hair salons, for example, have been left trying to learn about, set up and operate computer networks on their own.

Dell comes to the rescue, offering three services. For $199 and up, small-business owners can get an expert opinion on what they need for a complete computer network.

Next, Dell will install all the necessary components to complete the network. It also will make sure the information and files from the businesses’ old computers make it onto the new ones. Dell should rake in a lot of moolah, selling its own extensive line of products to small businesses.

Last, for $99 a year, companies will be able to access online courses for more than 340 applications.

Given that most American businesses employ far fewer than 100 people, and that it’s difficult to imagine a business that wouldn’t benefit from the efficiencies of technology, you have to wonder what took the computer giant so long.

Focus on percentages

In 1961, I wanted to invest $1,000, a small fortune to me. I decided to buy two shares of IBM, then trading at $525 per share. My broker said that two shares of IBM would return only $2 per dollar of price appreciation, whereas if I bought many more shares of a $10 or $15 stock, each dollar of price appreciation would net me many more dollars. I bit. Within a few years, my 100 shares of a cheaper stock were worthless, while IBM just kept going! I often wonder what two shares of IBM bought in 1961 would be worth today. — Margaret Schwarz, Sacramento, Calif.

The Fool Responds: The two shares would now, after splits, be many shares, worth more than $11,000 — and that’s not counting decades of dividend payments. Your broker was wrong to focus on dollars of appreciation instead of percentages. If a $20 stock rises by 10 percent, that’s a $2 rise. But if a $500 stock rises by 10 percent, that’s a $50 increase. Many people don’t understand that stocks priced in the hundreds can certainly keep growing, sometimes being split.

Time value of money

What does “time value of money” mean? — A.P., Green Bay, Wis.

It refers to how money’s value changes over the years. Imagine you’re given a choice: a dollar today or a dollar in 10 years. Naturally, you’d prefer the dollar today because it’s more valuable. You could invest it and it would grow to more than a dollar in 10 years. Or you could buy a loaf of bread with it. In 10 years, because of inflation, a dollar will probably buy only a few slices of bread.

Stock analysts consider the time value of money when they use “discounted cash flow” (DCF) analysis to calculate the value of companies. (Warning: This is complicated stuff. Proceed at your own risk.) They create DCF models, estimating how much cash a firm will spew out over time. Earnings for future years are then “discounted.” (The higher the interest rate climate, the higher the discount rate used.)

As a simplified example, imagine that Free Range Onions Inc. (ticker: BULBZ) will generate $5 next year and you’re discounting that at 10 percent. Take 1 and subtract 0.10 (for the 10 percent), getting 0.90. Multiply that by $5 and you’ll get $4.50 for next year’s earnings. So the “present value” of those future earnings is $4.50.

In high school economics, I learned that the more demand for a product, the higher the price and vice versa. If this is true, how can stock market prices fall with the constant influx of 401(k) money? This money is going in at an unbelievable rate, week in and week out, with no regard to the market being up or down. — Rich Janeczk, via e-mail

You’re right that 401(k) money does keep being invested. But over time, its mix can change. People might shift some of their 401(k) money from stock funds to bond funds or other options that are perceived or promoted as “safer.” In recent months, bond funds have experienced net inflows of billions of dollars, while stock funds have suffered net outflows of billions. Also, many people have just been selling the stocks in their portfolios.

The stock market isn’t one big thing that moves on its own. Instead, it’s made up of thousands of stocks, each rising or falling on various days. During skittish times, money might be pulled out of some sectors and moved into others. Even though most stocks might be down, some might be up.

Do you recommend pet health insurance? — S. G., Reno, Nev.

Definitely consider it. No one wants to end up having to decide whether to spend thousands of dollars to save Fluffy’s life. Pet insurance typically costs between $100 and $500 per year. See if your company offers it to employees. If it doesn’t, ask for it. Meanwhile, look into insurers such as Veterinary Pet Insurance (www.petinsurance.com or 800-USA-PETS) and Premier Pet Insurance (www.ppins.com or 877-774-2273).

What is the Federal Reserve? — Ken B., via e-mail

Founded by Congress in 1913, the Federal Reserve is the central bank of the United States.

In its own words, the Fed’s duty is “conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices; promoting the stability of the financial system; providing banking services to depository institutions and to the federal government; and ensuring that consumers receive adequate information and fair treatment in their interactions with the banking system.”

Learn more at www.federalreserve.gov.

Variable annuities

Though annuities are technically insurance products, they’re often promoted as investments — as retirement savings vehicles with returns that “vary” according to how you invest the assets. Don’t invest in variable annuities without understanding them. Here are some things to know:

• Investments in variable annuities do grow tax-deferred. But you can also get tax-deferred growth from 401(k)s or traditional IRAs, possibly along with a tax deduction. With a Roth IRA, you don’t get the tax deduction, but earnings grow tax-free.
• When you buy into an annuity, be prepared to stick it out, or get stuck. Those who withdraw their money within the first few years often have to pay “surrender” fees of 6 percent to 9 percent. On $100,000, that could be as much as $9,000. Also, any withdrawals before you turn 59 1/2 will be assessed a 10 percent penalty under most circumstances.
• When you’re eventually taxed on annuity earnings, it’ll be at your ordinary income tax rate, which can approach 40 percent. The regular long-term capital gains rate on earnings in an after-tax investment is just 20 percent.
• Annual fees for variable annuities are typically between 2 percent and 3 percent. If your annuity is worth $100,000 and you’re paying 2.5 percent in fees, you’ll be forking over $2,500 per year. Ouch! The insurance component (the so-called “death benefit”) may not be as exciting as it seems. (The fact that you must be dead to receive it also detracts from its appeal.) Usually, your heirs will receive: (1) what you put into the annuity, (2) its current value, or (3) a “stepped-up benefit” based on the value of the account on a certain date — whichever is greater. If that value was locked in when the market was at record highs, and you die before the market recovers, then the insurance pays off for your family. Otherwise, it’s an expensive feature that makes more money for the insurance company than for you.

For most people, it’s best to max out 401(k)s and IRAs before thinking about variable annuities. Learn more at www.sec.gov/investor/pubs/varannty.htm.