Fool.com: Future Schlock, Part Two (Foolish Four) December 30, 1999

Future Schlock, Part Two
With a view of where we've been

BALTIMORE, MD (Dec. 30, 1999) -- Despite the uncertainty of the accuracy of millennium prognostications, I think I can say with some confidence that the year 1999, without doubt, is the end of the 1990s. Since history always provides better fodder for cold, hard facts than the future, I thought this would be a good time to review just what the Dow and the Foolish Four have been doing for these past 10 years.

On January 1, 1990, the Dow Jones Industrial Average stood at 2753 (compared with almost 11,500 today). In 1989 the 30 Dow stocks had gained about 32%, on top of gains of 14%, 16%, 22%, and 31% for the previous four years, counting backwards. (Yes, the dividend-adjusted return for all 30 Dow stocks WAS up 16% in 1987 despite the October crash. The average itself showed a lower return because it doesn't include dividends and is weighted toward the larger stocks.) That month, Money magazine recommended an "all-weather portfolio" consisting of 50% stocks, with the rest in bonds and cash.

I vividly remember reading an essay, in a well-respected periodical, by a preeminent economist of 1980s (whose name unfortunately escapes me). He predicted that the 1990s would be the decade of the bond. One would be smart to start selling stocks, which had already had their run.

This economist was just a wee bit wrong. Here's the scorecard for January 1, 1990, through December 28, 1999.

              Total Return        Annual Growth Rate
Dow 30              390%                   17.2%
S&P 500             425%                   18.0%
Foolish Four        525%                   20.1%
Beating the S&P     639%                   22.1%

It looks like those bondholders missed out on a pretty darn good decade, with the market averages far exceeding the long-term historical returns of 10-11%.

What did the Dow 30 look like in January of 1990? The list of the stocks differs in many ways from today's list. Fully 13 of the 30 companies on the list in 1990 are either not in the index now or have reorganized and changed their names. The names Primerica, Navistar, Allied Signal, and Woolworth have been relegated to the Dow dumpster. May they rest in peace.

There have been dramatic changes in the sector composition of the Dow companies as well. Back in 1990, there was only one stock that might be considered a "tech" stock -- IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>. Currently, there are four such companies, as Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> have joined Big Blue.

With the increase in tech stocks, there's a concomitant drop in companies that process or sell what are basically commodities. In 1990, such companies accounted for nearly a third of the Dow (nine of thirty). Today, there are only four. The Dow, like the American economy, is a-changing.

Not only are the businesses of the current Dow companies different now than a decade ago, their stocks are different in many ways. Of special interest to Foolish Four investors, there's been a significant change in the dividend yield of these companies.

The average yield for the 30 Dow stocks was 3.4% at the start of the decade, compared with 1.6% now. Sure, interest rates were higher then as well, with the one-year Treasury bill yielding 7.2%, compared with 5.2% today. But even though interest rates were higher, today the average yield of the Dow stocks is only 31% of the T-bill rate, compared with 47% in 1990. We've realized for a while now that, for various reasons, the yield of stocks (both absolute and relative to inflation rates) have been plummeting to historic lows.

What about the Foolish Four stocks, then and now? On January 1, 1990, the Foolish Four stocks were Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>, Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>, and Allied Signal, which merged with -- and now trades under the name of -- Honeywell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HON)") else Response.Write("(NYSE: HON)") end if %>. Only two of those companies are still in the Dow. The average yield of these four stocks was 4.8%, compared with a yield of the current Foolish Four stocks of 2.6%. Not surprisingly, the RP Ratio (calculated as yield dividend by the square root of the price) for the current Foolish Four stocks is currently only about half of the value for the 1990 stocks -- 0.338 versus 0.654.

So, the past decade has seen dramatic gains in the Dow stocks in general and the Foolish Four stocks in particular, even as the composition of the index has changed and yields have fallen. What does all this mean for the future of the Foolish Four for the (not-quite-new) millennium?

Don't ask me for yet another prediction. Besides, the Oracle of Delphi surely has the answer. Or maybe it's time to dust off the old Ouija board. Or my Magic Eight Ball. Or those tea leaves. Or better yet, everybody, let's take a peek at this month's Money magazine!