ASK THE FOOL
Vote Yea or Nay?
Q: Should a stockholder vote in favor of a company issuing more stock? In the past, I've usually voted "no" because it seems that they are diluting the value of my stock. I recently read that Vitesse Semiconductor will be issuing more stock to pay for a company that it's acquiring. What should I do? -- C. Stanley, via e-mail
A: Well, it all depends. Yes, adding more stock can dilute the value of the existing shares. Imagine that the Dodgeball Supply Co. (ticker: WHAPP) has just 100 shares of stock outstanding, and you own 10 shares, or 10 percent of the firm. If it issues 10 more shares, for a total of 110, your 10 shares are now only 9 percent of the firm. The value of your shares appears to have dropped.
A big factor, though, is why the company is issuing more shares. Sometimes it's just to permit a stock split or for employee stock options. If the additional shares are to buy another company and the deal is structured effectively, then it may be a smart move. Perhaps the acquisition will add much more in value to your company than it's costing in additional shares.
Q: What does "insured by FDIC" mean, and what does it NOT insure? -- H.A. Selko, Ambler, Pa.
A: The Federal Deposit Insurance Corp. (FDIC) insures our traditional checking, savings and money market accounts (as well as CDs) held at banks and thrifts for up to $100,000. Note, though, that the FDIC does not cover stocks, bonds, mutual funds, life insurance policies, annuities and the like. For these, check with your financial service company to see what kind of insurance may be provided.
Learn more about the FDIC at its Web site: www.fdic.gov.
THE FOOL SCHOOL
Of Funds and Fees
"Excellent! We think you'll be very happy with this mutual fund. Just sign right here. And there. Oh, those? Well, yes, we do charge some fees. All funds do. It's routine. Just sign here ..."
You probably realize that mutual funds charge fees. But if you're like most people, you don't really understand what the fees are for, and what's reasonable and not reasonable. So let's run through some fees, shall we?
Loads: These are simply sales charges -- commissions paid to the brokers who sell funds. Some funds have them and others don't. Many load fees are as high as 5.75 percent, or more. Imagine a fund with a front-end load of 5 percent. If you deposit $10,000, you'll immediately lose $500. Ouch.
Expense ratio: This number reflects what percentage of a fund's assets are deducted from it each year, typically to cover normal operating expenses, such as trading commissions. The median expense ratio for all funds is roughly 1 percent, but some funds charge as much as 5 or 10 percent, or more. (Really!) The following two fees are included in the expense ratio:
12b-1 fee: This is a marketing fee, covering the fund's advertising and more. Ironically, fund shareholders are bearing the cost of attracting additional money to the fund -- and when funds grow too large, their performance can suffer. 12b-1 fees are often 0.25 percent, but can be as high as 1 percent.
Management fee: This fee compensates the fund's management -- regardless of their performance. And oddly enough, while you might expect the percentage of this fee to drop as a fund grows in size, that doesn't always happen.
These fees all add up, and make it hard for a fund to outperform the market average. That's why among all funds, we prefer index funds. Vanguard's S&P 500 index fund, for example, sports an expense ratio of just 0.18 percent -- tiny.
While you can't know how much a fund will earn for you in a given year, you can tell how much it will be charging you. For more details, visit keyword: Sage on America Online, or www.morningstar.com and www.fool.com/school on the Web.
MY DUMBEST INVESTMENT
In May 1999, my husband was called by a broker in Florida and urged to buy 1,000 shares of a $2 stock. After my husband bought some shares, the broker called him almost daily to get him to buy 2,000 more shares of the same company. The stock showed little movement. My husband called several times to ask the broker to sell, but the broker wouldn't. The last time he called, he learned that the broker's branch had closed. The stock is now worth 3 cents per share and all this because the broker refused to sell, instead reassuring us that the stock would eventually go up. -- Shelly S., Swartz Creek, Mich.
The Fool Responds: That stinks. Brokers must follow your orders. (You can register complaints about brokers at www.sec.gov or www.nasdr.com on the Net.) Never let any cold-calling broker bully you into any action and always research a company before you buy into it. In addition, steer clear of any stocks trading for less than $5 per share. They're likely to be extremely volatile and risky.
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THE FOOL TAKE
Investors interested in performance and consistency should check out payroll processing warhorse Paychex Inc.
The Rochester, N.Y., company, which offers payroll services for small and mid-sized businesses, has reported net income increases in excess of 36 percent for eight consecutive years. That's beautiful soup.
The company's margins are swimming along nicely, as well. In the last quarter, gross margins moved up two percentage points over the year-earlier quarter to an amazing 76 percent, operating margins swelled to 35 percent from 30 percent, and net margins advanced to 26 percent from 23 percent. These numbers mean that it costs Paychex 24 cents (100 minus 76) to produce a dollar of sales, and that the company keeps 26 cents of profit from each dollar of sales.
Net income, earnings per share and solid margins tell just one part of a company's profitability story. If those numbers are backed by a solid balance sheet and healthy cash flow statement, then steady earnings and margin growth is truly impressive.
Paychex has $65 million in cash, pays a dividend, has no debt, sports a 37 percent return on equity, and saw its payroll client list grow 9.2 percent last year. Not bad at all. The company soon will offer new products to facilitate data entry, including a general ledger interface that can import data from accounting products. Investors hungering for consistency should see if Paychex fits their bill.