Last week’s question and answer

I was founded in 1960 when two brothers bought an Ypsilanti, Mich., pizza store. One brother traded away his half of the business a year later for a Volkswagen Beetle. Today I’m a world leader in pizza delivery, running more than 7,450 stores in the United States and more than 50 countries. Some 90 percent of my stores are franchised. In 2003, my sales topped $4 billion. I began using an innovative hot bag in 1998 to keep delivered pizzas warm. In 1998, my founder sold 93 percent of me to Bain Capital. Who am I? (Answer: Domino’s Pizza)

Money-saving tips

Companies frequently announce that they’re buying back some of their shares. Recently, Federated Department Stores, Comcast, Viacom and Microsoft, among many others, have done so. When a company buys back stock, it typically does so on the open market — it doesn’t buy your shares, unless you happen to be selling them. You keep your shares.

With the company out there buying shares, the stock price may pop a bit, due to an increased demand for the shares. Generally, the more shares a company buys and retires, the better off you, the shareholder, are. Imagine that Dodgeball Supply Co. (ticker: WHAPP) is divided into 100 shares. If you own 25 of them, you own 25 percent of the company. If the company buys back 50 of its own shares, then there will only be 50 shares. You’ll still own your 25 shares, though, so you now own 50 percent of the company.

That’s extreme, of course, but it’s to make a point. The more shares that are bought back, the greater your share of a company’s earnings. If Dodgeball Supply earned $100 in net income, that would be $1 EPS (earnings per share), pre-buyback. After the buyback, though, the firm would still have the same earnings, but those earnings would be spread over just 50 shares — so the EPS would go up to $2. The price-to-earnings (P/E) ratio, based partly on EPS, would fall, and each share potentially would be worth more.

If you’ve ever thought that a company should use available funds to pay shareholders cash dividends instead of buying back shares, think again. Remember that when a company earns income, it pays taxes on that. When it then pays out any dividend to you, you get taxed. So that income is taxed twice — hardly very efficient. By buying back shares, the company is still rewarding shareholders, by making existing shares more valuable, but it’s doing so in a way that does not trigger taxable events for shareholders.

Just make sure your companies’ earnings aren’t increasing solely because they’re buying boatloads of shares. Look for increasing sales or revenues, too.

AT&T’s kindest cut

AT&T (NYSE: T), struggling with shrinking revenues and earnings, may soon be forced to make a sizable dividend cut.

AT&T shares haven’t been a secure place for investors’ money for a long time. The company keeps reinventing itself. It went into the computer business. It took on massive debt to get into cable services — the same businesses it later sold to Comcast. To raise money, it unloaded Lucent Technologies, NCR and AT&T Wireless. Now, to slash costs, it will stop promoting its still-lucrative residential long-distance business — another potentially perilous move. Face it, AT&T lost its blue-chip status long ago.

AT&T’s 95-cents-per-share dividend far exceeds the estimated 52 cents it will earn this year. It will need to dig into retained earnings from last year to pay this year’s dividend.

With still-healthy cash flows, AT&T can probably manage the dividend payment this year, but for how much longer? Its lowered earnings expectations for 2004 prompted ratings agencies Moody’s and Fitch to downgrade its bonds to speculative junk grade.

For AT&T to keep going, every penny counts and can be used to pare down debt and invest in the latest technologies to help it compete in the business market.

Yield-hungry AT&T investors need to stop living in the past. A steep dividend cut is overdue. Without it, shareholders could be headed for even more trouble.

Full of holes

My most recent dumbest investment was in Krispy Kreme Doughnuts. I listened for a long time to the pundits on TV rave about those doughnuts. I can’t even remember what made me decide to buy the stock. But within two weeks of my purchase, the stock dropped from the $30s to the high teens, and now I guess I am part of a class-action lawsuit. Anyone who believes the stock dropped due to more interest in a low-carb diet is probably as misguided as I was in purchasing the stock for tasty reasons. — P.W., Skillman, N.J.

The Fool Responds: The doughnuts are indeed tasty, but the stock was overvalued for quite a while and still may not be a bargain. It’s good to invest in firms with popular products or services, but the price should be right, too. The company has been taking on debt to fuel growth, and its financials aren’t as rosy as they used to be. Making matters worse, there’s now an informal Securities and Exchange Commission investigation into the company.

Smart CD investing

If I want my short-term investments in certificates of deposit (CDs), is there any smart way to invest in them? — K.M., San Luis Obispo, Calif.

You can start by looking for the best interest rates for CDs that you can find — you needn’t buy only through your local bank. Click over to www.bankrate.com or www.fool.com/savings for guidance and good rates.

Next, if you think, as many do, that interest rates will rise during the coming few years, consider “laddering” your investments. CDs with longer maturities are carrying higher rates right now.

Depending on your needs and preferences, you might, for example, put a third of your money in six-month CDs, a third in two-year CDs and a third in five-year CDs. Then, as each matures, invest in new three-year CDs at the prevailing rates, which may well be higher. That way you’re not locking yourself into low rates for a long time.