Last week’s answer

Born in 1886, I’m “the company for women,” employing a female CEO. I offered women an income well before they were allowed to vote. I was founded by a man, though, as the California Perfume Co. In 1939 I got my current name, honoring the home of a famous European playwright. My sales team of nearly 5 million people serves customers in more than 100 nations, distributing hundreds of millions of catalogs and selling shampoo, jewelry, fragrances and more. I’m the largest direct-selling enterprise in the world, with annual revenues topping $7 billion. Who am I? (Answer: Avon)

Know the answer to this week’s question? Send it to us with Foolish Trivia on the top and you’ll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions and Trivia entries to Fool@fool.com.

A turnaround story

In the early 1960s, my wife inherited about 40 shares of Union Carbide from an old spinster ex-baby sitter, worth around $2,500, I think. Years later, a massive industrial disaster occurred in Bopal, India, weakening the company’s stock. Takeovers were attempted, but the firm offered shareholders debentures (whatever they are) if we would hang on. The company fought its way back and spun off Praxair, issuing shares to shareholders. Then Union Carbide was bought by Dow Chemical, and my wife got shares of that, as well. The value of her shares in both companies has topped $50,000 — a good example of holding on to worthwhile stocks. — A. Garinger, Harveys Lake, Pa.

The Fool Responds: Debentures are unsecured corporate bonds. It can indeed be profitable to stick with a holding through difficult times — but only if you have done enough research to be comfortable doing so. You need to be reasonably sure that the firm will pull through. If you’re just taking a chance and hoping for the best, you’re probably better served by finding a more promising place for your remaining dollars.

Annuities: Think twice

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 tax rates are low these days, and the money you ultimately withdraw will be taxed at income rates, not the lower rates for dividends and long-term capital gains. Also, you can get tax-deferred growth from 401(k) plans or traditional IRAs, possibly along with a tax deduction.
• 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 7 percent or more. On $100,000, that could total $7,000. Also, withdrawing before you turn 59 1/2 will generally result in hefty penalties.
• 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. (For starters, note that you must be dead to receive it.) Usually, your heirs will receive what you put into the annuity, its current value, or 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.

Fortunately, there are some companies — such as Vanguard (877) 662-7447 and T. Rowe Price (800) 225-5132 — that offer low-cost annuities and don’t levy surrender charges. 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 and at www.fool.com/retirement.htm.

Johnson & Johnson is A-OK

Health-care giant Johnson & Johnson (NYSE: JNJ) recently reported solid first-quarter results. During the quarter, worldwide sales of consumer products rose 11.4 percent, driven by a solid 20.7 percent jump overseas. The medical devices and diagnostic division saw revenues grow 16 percent to $4.8 billion.

The war over drug-coated stents — tiny devices that help keep arteries open — goes on. Johnson & Johnson was the first to enter the market two years ago, but Boston Scientific’s (NYSE: BSX) competing Taxus stent gained ground quickly, and it now controls 60 percent of the $4 billion market. Meanwhile, Medtronic (NYSE: MDT) is planning to enter the fray.

Sales in the pharmaceutical segment — Johnson & Johnson’s largest — came in 7 percent higher on mixed results. Epilepsy drug Topamax and rheumatoid arthritis treatment Remicade were the standouts — each reporting sales gains of 24 percent.

Last March, we recommended Johnson & Johnson in our Motley Fool Income Investor newsletter. Since then, the firm posted its 20th straight year of double-digit earnings growth, boosted dividends for the 40th year in a row, expanded gross margins to a phenomenal 73 percent, and delivered a 28 percent return for shareholders.

Market cap

Q: What’s a company’s “market cap”? — W.D., Panama City, Fla.

A: Think of a company’s market capitalization as a kind of price tag — it’s the current value placed on the firm by investors in the stock market. Calculating it is simple. Just take the current stock price and multiply it by the number of shares outstanding. Many online stock quote providers include shares outstanding and often the market cap, too. Imagine Meteorite Insurance Inc. (ticker: HEDSUP). Let’s say it has 25 million shares outstanding and trades at $30 per share. Multiply 25 million by $30, and you’ll get a market cap of $750 million. That’s the current market value of the company. If you wanted to buy the whole company, you’d have to fork over $750 million.

Market caps can be enlightening. For example, if you’re thinking of investing in Amazon.com, note that its market cap is around $14 billion. Compare that with Barnes & Noble and eBay, which sport market caps of roughly $2.5 billion and $45 billion, respectively. Does Amazon’s value seem reasonable in comparison? It depends on your assessment of its potential.