Name that company

Born as a knitting mill in Alexander City, Ala., in 1902, today I’m a major sporting goods company, with brands including Spalding, Huffy Sports, American Athletic, Jerzees, Mossy Oak, Bike, Moving Comfort and Cross Creek. I recently bought the Brooks running gear company. I was one of the first to make sweatshirts, introducing fleece-lined ones in 1930. I rake in about $1.3 billion per year. I’m a top supplier of U.S. athletic team uniforms and the world’s largest provider of basketball equipment. I produce enough yarn each week to make more than 100 trips to the moon. Who am I?

Last week’s question

My roots can be traced back to 1833. Today, based in Manhattan, I’m a world leader in odors and tastes. With offices in more than 30 nations, 55 percent of my revenue comes from fragrances and 45 percent from flavors. Some 71 percent of my sales are generated abroad. I help you and many of your household purchases smell or taste better. My flavors are used in processed foods, snacks, beverages, dairy products, confectionery, baked goods, pharmaceuticals and oral care products. I sell nothing directly to the public, but I still rake in more than $2 billion annually. Who am I? Answer: International Flavors and Fragrances

3Com fighting to survive

Networking specialist 3Com (Nasdaq: COMS) has been struggling. Though its losses in recent years have been shrinking, from $596 million in 2002 to $196 million in 2005, they’re still substantial.

3Com’s recent fourth-quarter report listed gross profit as 36 percent of sales, or $234 million, and sales and marketing expenses of $244 million. Wow. That means 3Com had to fund its remaining operating expenses from cash on hand. This company requires a serious turnaround, and it won’t be easy. Expenses must fall dramatically, and the company must gain ground on competitors.

The competition is no slouch, either. Cisco (Nasdaq: CSCO), the industry giant, generated more than $4 billion in profit during fiscal 2004 and grew third-quarter 2005 revenues by 10 percent over year-earlier levels. While revenue growth is slow throughout the industry, 3Com’s recent results are still below par. Its 2005 revenues were 6.8 percent lower than those of last year.

Without a clear path to future profitability, 3Com seems very risky at the current price. The stock may seem cheap to some, but every year that the company operates at a loss, cash is lost. In 2000, thanks to boom-time profits, the company had more than $3 billion in cash and equivalents. Today that number is $844 million. Go ahead and root for management to pull off this turnaround. Just don’t put your money where your mouth is.

Bid well on eBay

I bought shares of eBay about a year after they were first offered, and I’ve stuck with the company to this day. It’s done nicely for us. But I wasn’t smart or savvy. I just liked eBay and enjoyed using it. – Jim, Morris County, N.J.

The Fool Responds: Well, being familiar with a company and its products is a valuable first step when investing in it. But it’s not enough of a reason to buy shares. You might love your Chevy Impala, but that doesn’t mean that General Motors is the best place for your money. You need to consider, among other things, what a company’s big challenges are. Will GM gain market share from Japan and elsewhere, and meet its pension obligations? Will eBay become a top dog of online auctions and commerce in new markets such as China? Shares of eBay have advanced more than 4,000 percent since they debuted in 1998. (Of course, many investors weren’t able to snap up shares on the first day, and the price rose quickly. Still, even if you bought a year later, you’ve probably roughly doubled your money.)

Commissions and taxes

For tax purposes, can I deduct the trading commissions I pay to my brokerage from my net capital gain? – U.C., Nevada, Mo.

Yes, you can – and you should. The expenses incurred in buying or selling a capital asset (stock, in this example) are capital costs, and they need to be factored in to your cost basis and proceeds.

Imagine that you buy $3,000 of stock and pay $30 in commission and other charges. Your actual cost is $3,030. You sell the stock later, when it’s worth $4,000, paying another $30 to the brokerage. Your “net” sales price (generally, the amount reported to you by your broker at year-end on your Form 1099B) would be $3,970 ($4,000 less $30). On your tax return, you would report a gain of $940 ($3,970 less $3,030 equals $940.) By ignoring the cost of commissions, your gain would be $1,000, and your taxes would be higher.

This exercise can help you focus on how much you’re paying in commissions. For many investors, it’s too much. Some reputable brokerages charge just $10 or less per trade. For tips on finding a good brokerage, visit www.broker.fool.com and www.sec.gov/answers/openaccount.htm.

Dividend yield

If two companies each pay out $2 annually in dividends, they may seem equally attractive on that basis. But you really need more information.

One might be selling for $20 per share, and the other for $100. If so, you’ll be getting a much bigger dividend bang for your buck with the former firm. Its dividend yield is much higher.

A company’s “dividend yield” expresses the relationship between its stock price and the amount of its annual dividend. Consider financial giant Citigroup, recently trading around $46 per share and paying a dividend of 44 cents per quarter ($1.76 per year). Dividing $1.76 by $46 gives you 0.038. Multiply that by 100, and you have a dividend yield of 3.8 percent. If you pay $46 for a share of Citigroup today, you’ll earn 3.8 percent per year on your investment, just from dividends alone.

Better still, dividends of healthy companies tend to increase over time, delivering additional value.

If in 20 years Citigroup’s dividend is $5, that would represent an 11 percent dividend in relation to those shares you bought for $46. (You paid $46; you receive $5 per year.) You’d be earning 11 percent each year, just from dividends. There would likely be some stock price appreciation on top of that, too.

Companies rarely decrease or eliminate their dividends, as that would make investors unhappy. It does happen, though. Ford reduced its dividend in 2002, while auto part supplier Visteon recently eliminated its dividend entirely.

Dividend yields usually fluctuate daily, since they’re tied to the stock prices. As a stock price rises, the yield falls, and vice versa. If Citigroup’s shares, for example, suddenly doubled in price to $92, the yield would be halved, to 1.9 percent ($1.76 divided by $92 is 0.019).

You’ll find some hefty yields among companies whose stock prices have tumbled – but be careful. Some such firms never recover from their troubles.

Not all companies pay dividends. Some need to plow all their extra cash back into operations and growth. Microsoft began paying a dividend a few years ago, while eBay and Dell pay no dividend at all.