<FOOLISH WORKSHOP>

Plowback Revisited

by Jim Stevens ([email protected])

Burlington, VT (November 19, 1998) -- Investing icon Warren Buffett purportedly has a penchant for companies that have a high return on their capital, and especially ones that put a lot of that profit right back to work in generating even more return. "Plowing back" these profits, if the company is managed well for the long term, can compound a company's growth. This increases shareholder value and, unlike dividend distributions, is free of current taxes. Taxes are only owed when an owner sells shares. Warren Buffett may have a lot more zeroes in his net worth then the rest of us, but just like us, he puts his pants on one leg at a time, and he hates paying taxes!

As a springboard for further research, the Workshop has previously published a list of companies from the Value Line Investment Survey with the highest "plowback" ratio. Value Line defines this ratio as "net profit less dividends divided by common equity including tangible assets, expressed as a percentage." This is NOT a backtested model, it's simply one more mechanical way to analyze a group of companies before choosing stocks to invest in. Apparently we have some Warren Buffetts in the making reading the Workshop, as I've received some requests to publish a current list.

The list below shows companies with a Plowback Ratio greater than 25% and a market capitalization minimum of $15 billion -- the blue chips of the high Plowback Ratio stocks. They are listed in order of their total returns over the past six months:

Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>
Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>
Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>
Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>
Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
Int'l Business Mach. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>
Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>
Gap (The) Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>
Abbott Labs. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>
Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>
Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>
Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>
Sara Lee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>
Bestfoods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BFO)") else Response.Write("(NYSE: BFO)") end if %>
Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>
Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>

As of November 11, so far in 1998 the 19 stocks above have returned an average of 54.26%, compared to 15.51% for the Standard & Poor's 500 Index. This list is fairly static -- only Sara Lee is new to the list since the last update in June. This time only nineteen companies made the $15 billion or greater market cap screen, compared to twenty last time.

There's no way to tell whether it's a trend, but it appears the high Plowback Ratio stocks are definitely deserving of further examination.

Stay Foolish!

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database