The Daily Dow
Friday, June 13, 1997
by Randy Befumo (TMF Templr)
WILLIAMSBURG, VA. (June 13, 1997) -- Yesterday we discussed how the sheer size of the stocks in the Dow may affect the returns investors can generate with the Dow Dividend Approach. Because these 30 companies make up about 40% of the market capitalization of the S&P as a whole, over longer periods of time there is a decent correlation between the price moves of a basket of four to ten of the Dow stocks and the returns of the S&P 500. At the very least, given the size of the companies and their effect on the S&P 500, it would be very difficult to have a sustained divergence without the company (a) having to cut out its dividend entirely or (b) getting kicked off the Dow.
Size also is an indicator of something else -- quality. Very few companies become multi-billion dollar organizations without management depth, business know-how, and a competitive edge in its markets. Although all of this can fade at times due to temporary setbacks, huge companies got huge because they had many sustained years of success. Although sometimes the media can really pound on a company for some perceived short-term failing, in reality, giant companies are very difficult to kill off. While this may not guarantee positive returns, it certainly has the effect of cushioning the potential downside in any one stock.
Take the example of CITRIX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTXS)") else Response.Write("(Nasdaq: CTXS)") end if %>. A look at the last year in Citrix shows heart-stopping drops and joyous surges in the company's value. Citrix ran into a bit of trouble a few months ago when Microsoft threatened to duplicate its core WinFrame product. Microsoft later decided to license the product and promote it for exactly 30 months, probably the length of time it will take Microsoft to have its own version, but the possibility that overnight Citrix could not have a business was pretty scary for investors. Although we can certainly talk quite a bit about how MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> 55 cent Quarter Pounder (or was it Big Mac) promotion flopped, this is hardly going to put the company out of business. In fact, while all kinds of Chicken Littles were fretting over the failure of one promotional campaign, McDonald's same-store sales turned positive for the first time in months.
While McDonald's is not currently a Dow Dividend stock, it certainly makes the point one product slip won't crush a large company. This is because size and quality are so intertwined. When IBM was really reeling, the company had the wherewithal to attract Louis Gerstner, a man who actually had the ability to turn the juggernaut in the other direction. Could a small company with one or two products have the resources or the prestige to attract a Gerstner? Probably not, in most cases. Quality begets prestige, which in turn begets quality.
Even investors in the Nifty Fifty at its highs in the '70s learned this powerful lesson. Despite the reams of trash that have been written about how people lost money on speculations in these stocks over the next few years, investors who bought the Nifty Fifty at their highest prices had outperformed the market by the early '90s. Investors who were not blind to value and who actually managed to purchase the better names among the group at more reasonable valuations did quite well. These massive Dow companies are here to stay, and this longevity and persistence seems to have quite a bit to do with the solid returns that investing in the highest yielding of this elite group have provided over nearly four decades. Monday we will talk about the time frame for buying quality companies a bit more and look more precisely at the Nifty Fifty returns I hinted at today to illustrate this point.
NOTE: I have received a lot of mail over my comment vis a vis Michael O'Higgins earlier in the week. Sit tight folks... I will deal with this next week in this space after I finish with this exposition in why I think the Dow Dividend Approach works.
DOW STOCK NEWS
GENERAL MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> faces strike deadlines at two parts plants in Michigan. A Grand Rapids plant that makes hoods, doors, and fenders and a Saginaw plant that is GM's only North American foundry for metals used in certain transmission and steering parts are at risk. Sales for the U.S. auto makers have been crunched in recent months due to the disruption of these frequent strikes. Last year, General Motors reportedly lost $1.2 billion as a direct result of strikes. These potential walk-outs could delay production of 1998 full-size pick-up trucks.
AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> floated a trial balloon with the Federal Communications Commission (FCC) that has apparently crashed. Robert Allen sent a speech discussing a "hypothetical" merger with a Baby Bell to the FCC. FCC Chairman Reed Hundt responded that the possibility is "unthinkable" as it would defeat the purpose of telecommunications reform. The hang-up for local Bells getting into the long distance business has been that they have not made their markets open enough. For AT&T to buy its way in would not create fair competition, it would just mean AT&T would inherit a Baby Bell that has not done a good job of allowing competition. For more, check today's feature on the potential merger between AT&T and SBC Communications.
PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> continued to rise today on hopes that a wide-reaching settlement can be achieved next week. Negotiators from both sides sit down again on Monday to hash out the last remaining details. These include the particulars of FDA regulation of tobacco, the exact split of the $300 billion-plus between the states and the Federal government, and details of how a separate fund will be created out of this money to give uninsured children health insurance. One wonders if a tobacco industry regulated by the FDA donating billions toward healthcare and health insurance may be viewed differently by investors than one that is currently perceived as a haven for liars.
EXXON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> settled with the Federal Trade Commission today
regarding claims about the performance of high octane fuel. High octane fuel
is a big money maker for the gasoline companies. Announcement of the settlement
will not be made for a few weeks, but the company will definitely have to
change the way it advertises the fuel, as will competitors like
CHEVRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %>. The American Automobile Association stated, "Higher
octane fuel does not provide more power, burn more clearly or improve
performance... it's a myth."
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T + 1/2 37.75 GM + 3/8 57.25 CHV +1 1/8 76.00 MMM + 1/4 98.75
Day Month Year
FOOL-4 +0.98% 4.39% 4.84%
DJIA +0.92% 6.15% 20.68%
S&P 500 +1.11% 5.30% 20.59%
NASDAQ +0.83% 1.62% 10.22%
Rec'd # Security In At Now Change
1/2/97 120 3M 83.00 98.75 18.98%
1/2/97 153 Chevron 65.00 76.00 16.92%
1/2/97 179 Gen. Motor 55.75 57.25 2.69%
1/2/97 479 AT&T 41.75 37.75 -9.58%
Rec'd # Security In At Value Change
1/2/97 120 3M 9960.00 11850.00 $1890.00
1/2/97 153 Chevron 9945.00 11628.00 $1683.00
1/2/97 179 Gen. Motor 9979.25 10247.75 $268.50
1/2/97 479 AT&T 19998.25 18082.25 -$1916.00
CASH $609.53
TOTAL $52417.53