Fool.com: Plowback Ratio (Workshop) December 17, 1998

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Plowback Ratio

Burlington, VT (Dec. 17, 1998) -- As the Plowback Ratio has piqued the interest of more than a few Workshop readers, today I'll do an update on the Plowback screen we've been watching. If you haven't been clued in yet on the Plowback Ratio, it's a measure of the net profit that a company reinvests in its operations, expressed as a percentage of common equity. It's almost the same as straight ROE (return on equity) but includes subtracting out any dividend distributions from the return before calculating the ratio. The Value Line Investment Survey electronic edition lists the ratio for each company in its survey every week.

What we've been doing here in the Workshop from time to time this year is following a group of high Plowback Ratio stocks -- companies with ratios above 25%. By looking at the twelve-year history of the Keystone stocks, one can see that a bias toward large cap companies has provided a significant edge, so in this experimental screen we stick with the 20 largest companies making the 25% Plowback cutoff.

The list below shows the 20 largest companies with Plowback Ratios greater than 25% from the entire 1700-stock Value Line universe. They are sorted in descending order of their total returns over the past six months with the 26-week return percentage listed:

Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>       73.97%
Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>  73.87%
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>     62.81%
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>   55.38%
Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>     53.08%
Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>      47.24%
Int'l Business Mach. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> 44.97%
Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>   34.76%
Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>         33.81%
Abbott Labs. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>         32.57%
Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>             30.81%
Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>      22.72%
Gap (The) Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>       19.66%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>         2.12%
Bestfoods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BFO)") else Response.Write("(NYSE: BFO)") end if %>            -4.83%
Sara Lee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>       -5.42%
Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>     -9.83%
Kellogg <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %>               -12.23%
Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>            -16.86%
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>  -19.99%

The last download from Value Line had returns updated through December 9, 1998. I averaged the column of "year-to-date" total returns for these twenty companies and got 60.49%. That's close to triple the 21.95% Standard & Poor's 500 Index performance over the same period. Maybe there's something to this Plowback stuff!

The last time I reported on Plowback, in my haste I left the market cap filter at a fixed level, which yielded 19 stocks. Rather than continuing to do that and possibly generating a different number of companies each time, I am including simply the twenty largest stocks. A quick glance at the list shows that the tech companies dominate the high Plowback stalwarts. Since technology has been performing so well of late, the companies also occupy the top eight 26-week relative strength slots.

Big "don't blame me!" disclaimer section: This is not a backtested model and by no means a way to invest a complete portfolio. Looking at how current performance correlates to some of these fundamental data points is just a great way to sift through the barrage of information available on different investment choices. From there you can do stock by stock research to see if a company warrants your investment dollars, or possibly to see if any of the companies show up on a favorite backtested screen.

Smile, laugh, be a Fool!

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