<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (March 16, 1998) -- On Friday, Alcoa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AA)") else Response.Write("(NYSE: AA)") end if %> announced that it will be paying a fifty-cent-per-share bonus dividend this year. This Dow component treats dividends a little bit differently from the rest of the companies, so before you ask, let me tell you why Alcoa isn't in our top ten high yielders.

The standard model for dividends is that a company will announce a dollar amount per share to be paid out in cash to shareholders quarterly. And unless the company's board of directors actively votes to raise or lower the dividend, the level is assumed to be fixed indefinitely.

When a company raises its dividend, investors see it as a sign of confidence that the company's making a bigger profit and everyone's happy about it. When a Dow company cuts its dividend, investors glance quickly to see for whom the bell tolls. In general, dividends remain constant or get raised gradually. A cut dividend is unusual.

But Alcoa is taking a different, two-pronged approach to dividends. The company pays a regular annual dividend of $1.00 per share. That's the same as the regular dividends we expect from all thirty Dow stocks. In addition, the company has adopted a policy of paying a bonus dividend of 30% of any annual earnings in excess of $3.00 per share. For example, Alcoa earned $4.66 last year, so it will pay out an additional $0.50 per share in dividends over the next four quarters. (30% of $1.66 is 50 cents.)

What to do? What to do?

Our policy is not to include bonus dividends that aren't considered permanent and recurring in our yield calculations, so even though we know Alcoa will pay 37.5 cents per share for the next four quarters, the only portion of that dividend we can count on being there a year from now is the regular 25 cents a quarter. If Alcoa's earnings slow, they'll cut this bonus dividend. If business booms, the dividend goes up, but each year represents a temporary level that may or may not be sustained in the future.

So you won't see Alcoa in our top ten yielders right now, even though some quote services will list its yield including the bonus dividend. If you wish to include Alcoa in your deliberations, of course, you can argue a reasonable case for doing so, but it's important that I make clear why we're not including it in ours. With the bonus dividend, Alcoa is among the ten high yielders, but it's not without the bonus. And it's on that permanent and ongoing dividend that we make our calculations. Fool on!

Go Cats!
Kentucky 88 - South Carolina St. 61

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TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   -   9/16  46.06 
 IP   +1  9/16  52.56 
 MO   -   3/8   43.06 
 EK   +1 13/16  62.44 
 
 
                    Day   Month    Year 
         FOOL-4   +1.06%   1.61%   6.84% 
         DJIA     +1.35%   2.03%  10.25% 
         S&P 500  +1.00%   2.85%  11.22% 
         NASDAQ   +0.93%   1.00%  13.87% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     52.56    21.88% 
  12/31/97  291 Union Carb    42.94     46.06     7.28% 
  12/31/97  206 Eastman Ko    60.56     62.44     3.10% 
  12/31/97  276 Philip Mor    45.25     43.06    -4.83% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15190.56  $2727.44 
  12/31/97  291 Union Carb 12494.81  13404.19   $909.38 
  12/31/97  206 Eastman Ko 12475.88  12862.13   $386.25 
  12/31/97  276 Philip Mor 12489.00  11885.25  -$603.75 
  
  
                              CASH     $77.19 
                             TOTAL  $53419.32