<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 9, 1998) -- I've received a number of questions regarding the current tendency of companies to buy back their own outstanding shares rather than pay out excess profits in higher cash dividends and whether this will hurt the Foolish Four approach in the future.

Let's look at a couple of factors. First, it's true that historically, the average raw dividend yield today is low. The average yield for the Dow 30 is only 1.75%. But simply looking at the yield in isolation is only part of the story. With interest rates and inflation also at historically low levels, the yield is not inordinately low in comparison.

In fact, one study I read last fall suggested that on an inflation-adjusted basis, the current Dow average yield is right in the middle of the range of historical norms. So I would ascribe the "low" current yields to inflation more than an active policy by American Blue Chips of disregarding dividends.

It is also true that because companies can make a more tax-efficient use of excess earnings through share buy-backs than in paying increased dividends, they are paying more attention to such programs. But I don't see the trend becoming so pronounced as to hurt the Dow culture of paying consistent and increasing dividends. Several companies have hiked their dividends already this year; the two companies that paid no dividends -- Woolworth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> and Bethlehem Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %> -- were bounced out of the Dow Jones Industrial Average last year; and annual reports and corporate marketing literature for many of these Blue Chips still boast of their long-term dividend records.

While there is definitely an attraction for companies to buy back shares as one option to boost shareholder value, I'm not yet convinced that for this group of stocks at least there's a terrific immediate threat to the Dow Dividend Approach's fantastic historical performance. If one looks at the returns of the basic models over the last several years, the approach is still working very well. Until such time as we see a real cessation of dividend increases and a falling off of the strategy's results, I don't think we need to become overly concerned.

And who knows what possible tax changes will bring in the future? If, for instance, Congress changes the tax code to a consumption tax or a flat income tax as has been bandied about for the last few years, that would remove the penalty on dividends (taxed currently as ordinary income) and give the companies back the incentive to pay out dividends at even higher rates. So while this is a topic that bears watching, I don't believe it's a cause for concern yet. Fool on!

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TODAY'S NUMBERS

Stock Change Last -------------------- UK + 3/16 46.94 IP --- 47.75 MO - 9/16 43.75 EK - 1/4 64.88

Day Month Year FOOL-4 -0.29% 4.02% 5.95% DJIA -0.11% 3.47% 3.44% S&P 500 -0.17% 3.11% 4.15% NASDAQ -0.23% 4.39% 7.65% Rec'd # Security In At Now Change 12/31/97 289 Int'l Pape 43.13 47.75 10.72% 12/31/97 291 Union Carb 42.94 46.94 9.32% 12/31/97 206 Eastman Ko 60.56 64.88 7.12% 12/31/97 276 Philip Mor 45.25 43.75 -3.31% Rec'd # Security In At Value Change 12/31/97 289 Int'l Pape 12463.13 13799.75 $1336.63 12/31/97 291 Union Carb 12494.81 13658.81 $1164.00 12/31/97 206 Eastman Ko 12475.88 13364.25 $888.38 12/31/97 276 Philip Mor 12489.00 12075.00 -$414.00 CASH $77.19 TOTAL $52975.00