Dear Mr. Berko:
My broker wants me to sell my 2,094 shares of Wal-Mart and use $8,000 of the money to take what he calls a “businessman’s risk” and buy 2,000 shares of Tower Group International, which would pay a 66-cent dividend yielding 17 percent, at $3.89. His insurance agent represents Tower, which insists that management has no intention to cut the dividend because the company has plenty of cash. What do you think? My broker says Wal-Mart’s growth will stop dead if it pays employees $15 an hour, which he says would increase its labor costs by 35 percent. He says a $15 hourly wage would ruin Wal-Mart and wants me to put that money in an indexed annuity. Your advice, please.
— RJ, Wilmington, N.C.
Dear RJ:
I liked your broker until he recommended an indexed annuity, a product that is the cause of more complaints than you can wiggle your toes at. Yeech! Indexed annuities, as a wise uncle Remus might say, “are like walkin’ barefoot tru da briar patch.”
But if you can chew bottle glass, complete 50 pushups on a bed of nails, bathe in molten lava and then head-butt a unicorn, you might consider owning Tower Group International (TWGP-$2.90), a property and casualty insurance products and insurance services firm with $1.4 billion in revenues. TWGP is home-ported in Bermuda, a delightfully British territory with exceptional banking laws. TWGP was trading at $22 last August, when management reported losses exceeding $12 a share, or more than $500 million. Resulting doubts about the adequacy of its loss reserves collapsed the stock 18 points in the following months. Still, TWGP has a $10.09 book value, including $2.12 a share in cash, and is rumored to be able to return to profitability this year. So some observers feel the 66-cent dividend (totaling about $38 million), yielding a blinding 17.3 percent, won’t be cut. However, Mike Lee — the chairman, CEO and president — sold more than 1.2 million shares last September between $10 and $12 a share. So I’d call TWGP a flaming rank speculation rather than a “businessman’s risk.” Meanwhile, an insurance mogul I know at Travelers, one of the large companies with which TWGP coordinates its business, agrees. If you can afford the risk, risk it!
I didn’t care for Wal-Mart (WMT-$78) a dozen years ago, when revenues were $248 billion, earnings were $1.80 a share, book value was $8.95, the dividend was 30 cents and the stock was $64. This year, revenues may reach $497 billion, and earnings should increase to $5.65. The book value could be $28, and the dividend may be raised to $2.10. But the stock still is trading at a middling $78. But big deal! During that same dozen years, Costco (COST-$115) tripled its revenues, its earnings and its share price. And yes, a wage increase covering Wal-Mart’s 2.2 million employees to $15 an hour would be ruinous to WMT’s 3.6 percent net profit margins.
WMT continues to increase revenues, earnings and dividends, but its share price lags the market. How much longer can WMT maintain its impressive growth? At some point, companies like WMT begin to self-destruct or hit a Chinese wall. Carl Sagan, an astronomer/philosopher, addressed this phenomenon in his musings about bacteria that reproduce by dividing in two every 15 minutes. This means four doublings an hour and 96 doublings a day. Although a bacterium weighs a trillionth of a gram, its descendants, after a day of wild sexual abandon, will collectively weigh as much as a mountain. In two days, they’ll weigh more than the sun, and before long, everything in the universe will be made of bacteria. But something always impedes this kind of growth; they run out of food, poison one another or become shy about reproducing in public.
Now, WMT isn’t a bacterium, but in a finite world, WMT could find it difficult to double every 15 minutes or maintain its impressive growth. And if Doug McMillon, WMT’s new CEO, makes one slip in the next few years, the Street won’t take kindly to the stock. Sell it, but you need to find a money manager whom you can trust.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
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