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EAST W89“; MQfiCAN A Michigan State University //£ONG TERM.INVESTMENT SECURITIES FOR PROFESSIONAL WOMEN / Lucille Ashmore August 12, 1960 HMCD 513a 131} m THS ACKNOWLEDGMENTS The writer wishes to express her sincere appreciation to Dr. Grace B. Gerard for her gracious guidance and able assistance to make this study complete and current. ‘1 TABLE OF CONTENTS Chapter Page I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1 Importance of Long Time Planning Source Material II TYPES OF INVESTMENTS . . . . . . . . . . . . . . . . . . 4 Fixed Income Including social security; pensions; savings accounts in commercial banks, mutual savings banks, savings and loan associations, credit unions; life insurance protection and invest- ment; straight annuity; bonds of Federal gov- ernment, municipal, and corporations; pre- ferred stock. Variable Income Including real estate and common stock; institutional such as variable annuity and life insurance stock; closed-end trust, open- end trust; periodic, accumulation and rein- vestment, contractual, and informal; indivi- dual investment plans, M.I.P. III INVESTMENT OBJECTIVE . . . . . . . . . . . . . . . . . . 38 Income Capital Gains or Growth Combination (Income and Appreciation) IV CRITERIA FOR SELECTION OF INDUSTRIES ACCORDING TO OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . 43 Income Industries Including safety of principal; regularity of income; marketability; rate of return; and balanced portfolio. Growth Industries Including sales growth; cash flow; earnings; growth in equity; measuring growth. Chapter V VI VII VIII IX TABLE OF CONTENTS (Cont.) GROWTH OF THE ECONOMY IN THE 60‘S . . . . . . ..... . . Chemicals (Drug) Electronics Office Equipment Transport Equipment and Machinery Paper Gas & Electric Utilities Oil CRITERIA.FOR SELECTION OF COMPANIES WITHIN AN INDUSTRY. Sales and Earnings Price Range-~Current Price Price Earnings Ratio Dividend Payout Plow Back ’ Research and Development Capitalization Working Capital Rating SAMPLE PROBLEM. . . . . . . . . . . . . . . . . . . . . mNCLUS IONS I O O O O O O l O O O O O O O O O O O O O O BIBLIOGWHY . O C O O I O O O O O O O O Q C O O O O O 0 O O O Page 50 54 59 65 66 67 LIST OF TABLES Table Page 1 Ownership of Financial Assets Early 1957 . . . . . . . . 8 2 Savings and Loan Holding Companies--New Investment Media. . . . . . . . . . . . . . . . . . . . . . . . . . 14 3 Seven Ways to Protect a Family . . . . . . . . . . . . . 15 4 Tax Exempt Bonds vs. Taxable Yields. . . . . . . . . . . 22 5 Performance of Life Insurance Stocks . . . . . . . . . . 30 6 Bull Market was Mutual Fund Aid. . . . . . . . . . . . . 33 7 SiXEYear Market Performance of ZO'M I P Favorites. . . . 36 8 50 Stocks Most Popular with M I P Investors. . . . . . . 37 9 10 Stocks That Have Never Cut Dividends. . . . . . . . . 39 10 $200 a Month Portfolio.... . . . . . . . . . . . . . . . 45 :3 11 The Leading Tire Manufacturers . . . . . . . . . . . . . 61 12 The Rubber Industry . . . . . . . . . . . . . . . . . . 63 K) I) CHAPTER I INTRODUCTION Importance of Long Time Planning Women need to know how to make long range financial plans to have a happy and secure retirement. Many years ago men were the breadwinners and the fiscal agents. Now there are increasing numbers of professional women and widows, many with children to rear, that need to understand how to plan for financial security. Also, since "women own over two-thirds of the private wealth of America"1 they should know how to use this wealth so they can receive the maxi- mum benefits. A good financial plan will give increased income through interest and dividends, and it will also give principal appreciation if sound investing practices are followed. Perhaps the greatest benefit of all would be the satisfaction received by knowing that you can enjoy the level of living that you had planned for many years earlier. Each plan must fit the investor's income, age, circumstances, future prospects, personality, temperament, likes and dislikes. Webster2 says to invest is to lay out money to obtain an income or profit. In order to prepare a private retirement income for a respectable level of living, each person or family must learn to do without the un- necessaries and save part of the earnings for the future. By using these 1Mabel R. Putnam, What Every Woman Should Know about Finance, (New York: Charles Schibner's Sons, 1955), p. 8. 2Webster's Collegiate Dictionary, Fourth Edition. I.) savings for investments, it makes you independent of Social Security and pension benefits, which really are delayed payments. So these should be considered part of the retirement income rather than the basis for a level of living after retirement. Realistic financial goals should be a part of every person%;or family’s philosophy of life; a most direct route should be made to reach these goals. The long run forecasts of continuing prosperity permits planning for an optimistic future. Each financial planShuflm.provide for emergencies, major future expenditures, life insurance and retirement income. This paper is most concerned with the investing of these savings for future use. Source Material For long range planning one must seek reliable and current infor- mation. There are several dependable rating companies, investment ser- vices or weekly publications that may be used. John Moody established a rating system for securities in 1909. The purpose of the bond rating is to provide the investor with a rating scale showing the relative qualities of bonds. The rating symbols, starting at top with bonds of highest quality,are: Aaa, As, A, Baa, Ba, B, Caa, Ca and C. The Aaa bonds represent the higheSt quality bonds and the least amount of risk. The bonds rated with C have a greater degree of risk and do not have any real investment standing. Bond ratings change from time to time as economic conditions change. Moody also ranks stocks through "Moody's Ranking Scores". These scores compare stocks' past price and dividend records. This performance may be compared to Moody's 125 Industrial average, which always equals ‘1 r) 100. The Ranking scores compare "(1) long term dividend stability, (2) long term price growth and (3) recemtprice behavior."3 Moody's publish numerous current periodicals that cover the . investment field. Standard and Poor's have a like service. Their bond ratings start with Al+, A1, A, Bl+ which can all be considered as bank quality bonds. These bond ratings continue with Bl, B, Cl+, Cl, C through Dl-D which represent the more speculative issues. Dl-D are the bonds that are in default. 'Standard and Poor's stock rating goes from A+ (excellent), A (good),.A- (above average), B+ (average), B (below average), 8- (low), to C (lowest). These scores are developed after examining the earnings of the last eight years, the dividend and growth records. Standard and Poor's point out that these ratings cannot be substituted for market recommendations because sometimes a high grade stock becomes overpriced. Financial World also has a rating for stock. These ratings go from A+, A, B+, B, 0+, C, D+, D, R and x. The A+ ratings are well estab- lished stock with good earnings, D are speculative, R is in reorganiza- tion and X in the process of dissolution. Financial World's intent is to use these ratings to represent a position of the stock in a wide range of investments. There are other sources of reliable information like Fitch, Barron, Kiplinger, Forbes, Fortune and others. Probably most people use a combination of these sources. Many of these have weekly publi- cations. Some also have investment services and will make a contract to supervise your securities, if your portfolio is of sufficient size. iMoody's Stock Survey, July 18, 1960. .3 2-3 ;i ~’\' ,, I b4 CHAPTER II TYPES OF INVESTMENTS Fixed Income Investments are of two types. They have fixed or variable incomes. Each type has its use and serves a definite need. There are advantages and disadvantages to both. Fixed income investments include such things as social security, pensions and savings held in banks or other safe places. The fixed income gets its name from the fact that you will receive a fixed number of dollars. The value of the dollar changes from time to time. For some time our country has been in a period of inflation, which means the purchasing power of the dollar has decreased. The fixed number of dollars you reCeive from these sources will purchase fewer goods and services now than--say ten years ago when you made the investment. Social Security The Social Security Act of 1935 was passed by our federal gov- ernment to help solve personal financial problems. This law has sev- eral parts. The one of greatest interest here is the Old Age and Survi- vors' Insurance Benefits. The purpose of this is to provide minimum financial protection against consequences of old age, premature death and total disability. Several specific features are (l) old-age income can start at sixty—five for men and sixty-two for women, (2) lump sum benefit is available on death of the insured, (3) survivors benefits are available for dependents of an insured worker and (4) disability 4Jo Bradley and R. Wherry, What Every Woman Should Know about Finance (Rinehart, 1957) p. 250. g... I! "... 5 income to disabled workers over fifty and his children. A fully quali- fied retired worker at age sixty-five can receive $119.00 at the present time. If a woman elects to retire at sixty-two and draw social security benefits, she will receive eighty per cent of the maximum. This cannot- be increased at age sixty-five. Should a woman elect to start drawing her social security benefits at age sixty-two and live for more than fifteen years, she will receive a smaller sum than she would, had she elected to wait until the age of sixty-five and drawn the full benefit. Naturally, her health is the major factor in making this decision. Congress has liberalized the benefits of the Social Security Act with each succeeding election. The latest benefits were effective in 1959. This Act was an outgrowth of the depression to provide benefits for the unemployed and to encourage the workers near and over sixty-five to retire, so younger workers could be on the payroll. The benefits have been continuously expanded. Now the problem "is to hold the Social Security system within bounds--to prevent its being developed into a serious threat to our economic well-being."5 Linton is afraid that the individual will loose his initiative in making his own retirement plans. Another danger the public should be aware of is the long range cost of the Social Security program. Under the 1959 law it is possible for a retired worker and his wife to receive old age bene- fits of at least fifty per cent of the wages they earned. "The payroll tax has been sufficiently large to enable accumulation of a reserve or 6 Trust Fund of approximately $23 billion as of the end of 1958" This 5M. Albert Linton, "Social Security and Life Insurance," p.2. 6Ibid., p. 10. 6 fund has been decreasing and one wonders just what the future might be. Pensions A large number of professional women now earn their living as public school teachers. All Michigan public school employees outside of the city of Detroit come under The Michigan Public School Employees Retirement System. Contributions are deducted from each employee'spay and placed in the Annuity Accumulation Fund. Each.member has an account and interest is compounded annually at the rate of 2% per cent. This fund is held for each individual either to provide a refundeh n leaving public school work or to pay the annuity portion at retirement age. A minimum of ten years of service is required. A person with twenty-five or more years of service may leave public school work at any age and start drawing retirement pay at sixty. Anyone with thirty or more years of service may start drawing retirement pay at age fifty- five on a reduced basis. To estimate the retirement allowance do these things (1) find the average salary for your best five years, (2) take 1 per cent of the first $4,200 of that average, (3) take 1% per cent of the remainder and (4) add 2 and 3 above and multiply the total by the total years of service. Lawrence Von Zwoll,7 executive secretary of the Michigan Public School Employees Retirement Board feels that some precautions should be taken to improve the financial system of the retirement plan. Hesug- gests that the reserve be increased. The present percentages of school payrolls must not be reduced and in fact additional financing must be 7Lawrence Von Zwoll, "Retirement Fund Finances." 7 found. Employees nOw 44 years old will not be able to retire and draw allowances at age 60 unless additional financing is found. Employees of four teacher colleges are coVered by this same retirement system. Other colleges may have the TIAA--Teachers' Insure ance and Annuity Association. The Carnegie Foundation originated this plan for private schools. The University of Michigan has been a member for some time and Michigan State University is a more recent member. Today this Association gives economic protection with benefits providing "(1) income during retirement, (2) life insurance, (3) major medical expense insurance, and beginning in 1957, (4) total disability income insurance."8 The TIAA policy holders may transfer to any other participating school without loosing retirement benefits. The public school retire- ment plans are state wide rather than nation wide. The Carnegie Corpor- ation has also given additional grants to strengthen the reserve funds of the TIAA. This is a weak spot in the Michigan Public School Retire- ment System. Teachers have vested interest in both retirement systems and should work for continued improvement of the programs. Women working in industry or other areas should know what pen- sion rights and fringe benefits are available. Also, they should know what happens to the fund if they change employers, or if the fund is in safe keeping and is ear marked for them and/or their heirs. Savings The savings account is the first real step toward financial 8"Teachers Insurance and Annuity Association-~College Retire- ment Equities Fund," 1957 Annual Report, p. 3. independence. Table 1 shows the ownership of financial assets early in 1957.9 Table l OWNERSHIP OF FINANCIAL ASSETS EARLY 1957 (Owners as a Percentage of Spending Units) Total Checking Savings Savings Corporate Financial Assets Accounts Accounts Bonds Stock All spending units 55 50 32 11 All owners of financial assets 72 66 43 14 $l--$l99 64 39 20 ;l $200--$499 69 59 26 l $500--$999 70 69 42 5 $1000--$l,999 68 74 52 10 $2000--$4,999 77 84 57 13 $5000--$9,999 79 86 65 38 $10,000--$24,999 ‘ 82 87 7O 55 $25,000--and over 95 75 71 77 Saving takes will power, self-denial and patience. These qualities are not found in all people. Ward10 says the most important principles of economic growth are productivity and saving. Ward continues, "the most primitive econ- omies save a little--putting aside seed corn for the next harvest. Per- haps 5 per cent of national income is saved in this way. Economists reckon that, as a general rule, . . . . 15 per cent is the 'break through' 9Federal Reserve Bulletin, August, 1957. 10Barbara Ward, "The Economic Revolution," The Saturday Evening Post, p. 52. 9 point . . . . then they can generate each year enough savings to insure the expansion of both savings and Consumption."11 Applying this to individuals we can say 5 per cent savings gives us some security and 15 per cent would enable us to make the future more secure. If you have the desire and determination and follow a system saving will be part of your way of life.12 Putnaml3 says savings should be not less than ten per cent of your income, but it should not be so high that you can't afford to save this amount regularly. Putnam.also believes this fund should be increased until the cash reserve is large enough to meet living expenses for six months. This fund should even- tually be equal to one year's living expenses. This would then take care of any extraordinary emergencies and also provide a fund that could be used to take advantage of any investment opportunities that arise. This should be considered as a savings investment fund, not a fund for consumer buying. Cobleigh14 feels a general guide for a single person making $4,000 a year or more and having no family financial responsibilities should be able to save regularly eight to fifteen per cent of their in- come. A family of four on $6,000 should aim for five per cent saving. 11Ibid. 12George Katona, The Powerful Consumer (McGraw-Hill, 1960), p. 13. 13 Putnam, loc. cit., p. 13. 14Cobleigh, loc. cit., p. 21. 10 Cobleigh also feels you should have available in one place a rainy day fund equal to one-fourth of your annual income (before taxes). This is a flexible guide and as your income increases your savings fund should also increase. The savings unit is the dollar. These same dollars will be returned to you at some future date. These units or dollars might pur- chase more or less in twenty years. The total number of dollars cannot be less, but the purchasing power may be. Commercial Banks Savings can take many forms, from putting cash under the mat- tress to bank deposits. Obviously, keeping loose cash around.is hazar- dous; it can be lost or stolen too easily. "A low level of real income does not make for a low savings ratio, a rapid rate of rise in income, whatever the level, may do so."15 It is best to adopt a systematic plan of saving each payday. The amount you plan to save could be deposited in a savings account in a commercial bank. When you are selecting your bank it is wise to select one that is located conveniently, so it is easy for you to follow your savings program. Commercial banks offer many services and usually have highly qualified experienced officers. Commercial banks may be organized under national or state laws. Those organized under national charter must be members of the Federal Reserve System and the Federal Deposit Insurance Corporation. This organization insures each account up to $10,000. A state bank may belong 15Milton Friedman, "The Theory of the Consumption Function," p.234. 11 if it wishes. It is wise to select a bank that is a member of the FDIC. Your money is absolutely safe. The interest rate is comparatively low. Usually it varies from two to three and one-half per cent, although this can change from time to time. If possible, the interest should be left in the savings account, so you can earn compound interest (in- terest figured on both principal and interest). Many commercial banks require a thirty-day notice before withdrawing savings accounts. How- ever, this rule is seldom enforced so it-can usually be withdrawn— in case of need. Mutual Savings Banks Mutual savings banks were organized in the early days of our country to provide a place for the small depositors to have a safe place to save modest sums. Mutual savings banks are governed by state laws. These are found in seventeen states, predominately located in the New England and Middle Atlantic States, although they are also found in the 16 These mutual banks have no stock- Middle West and Pacific North West. holders. The organization has a fund which protects the depositors until reserve funds are established through earnings. Mutual banks have a good financial record. They usually protect their depositors with the Federal Deposit Insurance Corporation or its equivalent. Savings and Loan Associations Savings and Loan Associations are another good place to deposit savings. Like commercial banks these may be set up under a state or federal charter. The Federal Savings and Loan Associations are insured 16"Important Facts Abouthutu l Sayings Banking," National Asso- ciation of Mutual Savings Banks, p. 5. 12 by the Federal Savings and Loan Insurance Corporation. Many of the savings and loan companies organized under state charters also are insured by the Federal Savings and Loan Insurance Corporation. Barron17 estimates 93 per cent of all savings and loan companies are insured. When money is deposited in a savings and loan association you become a shareholder and so an owner of the organization. The share- holders elect a board of directors to manage the affairs of the associa- tion. These are non-profit organizations whose aim is to pool resources and lend funds to buy or remodel homes in the geographic area of the association. So the savings and loan portfolio is made up of cash, perhaps government bonds, but mainly residential mortgages. Since mortgages give a good return, the depositors earn 3.5 per cent on the average as compared to 3.2 per cent in mutual savings banks and 2.3 per cent in commercial banks. Some western associations paid as high as 5 per cent.18 Most savings and loan associations are_mutually owned whichgives each account holder mev'oteper share and surplus earnings are pro rated upon liquidation. Eleven states allow stock charters. California leads with 158 stock Savings and Loan Associations out of atotal of 172 char- tered associations.19 In stock companies the stockholders have the voting power and a right to all earned surplus. Since 1955 holding companies have been formed to buy several savings and loan associations. Stocks were sold in these new corporations; they have enjoyed a good earning.. 17"'Speculations in Thrift," Barron's, August 3, 1959, p. 3. 18Ibid. 19Ib1d. 13 There has been some criticism of these holding companies that they are forming monopolies and losing the "community" feeling. "Last Sep- tember holding companies controlling one or more associations were pro- hibited by Federal legislation from acquiring control of any additional ones."20 The holding companies feel by introducing Wall Street know- how the savings and loan companies have become more flexible. More mortgages have been granted and they feel they can raise interest rates to attract more savings. Holding companies can also grow by diversifi- cation. This has already been done by buying service companies, insur- ance and real estate companies. These holding companies are a product of the age and might prove a good investment. Table 2 on page 14 shows their income and earnings. Credit Unions Credit unions are another common organization used for deposit- ing savings funds. These also may follow a federal or state charter. The membership is limited to those having some common bond like occupa- tion, employment, or some like group. When savings are made you receive shares as you do in the savings and loan associations. Most of the officers serVe without pay, so the overhead is low which means that credit unions are a non-profit, cooperative organization and were really established to provide services for its members. Members can borrow on character up to certain limits. Often loans have credit life insurance protection which has the effect of doubling the dollar saving of a mem- ber who dies. 20"Growth Promise in Savings and Loan Issues?," Financial World, l4 ammo .m umsmaa .nqmoz qummou Hausdow Cu macaumfluoouoow ouommms NN wcoz amoH dNoH Hmno mmoo ”.0 we“ 0 O o o o c o o o o o o o o o o o O Hmflocwaflh 00”“: m ”coz “N90 mMoo .mOoo mHoo moN Ron 0 o o o o o o o o o o o o o o o onHHmm—HHH ommfin gum new w¢.omm mn.m Ho.m o¢.H o m¢.N O o.o~ m.¢~ . . . . . . . . . . . . . . Hdfioawaam cumumoz uwouo ma oaoz ou.H mm.H mm.o a o¢.o n m.HN m.o~ . . . . . . . . . . . . . . Awaocuaqh umuumao umuwm Hm oaoz mw.Hw om.~m m~.owm me.owu N.“ m n.m m . . . . . . . . . . . . . . . .aoaumumemm Huguemcam manna acme nmaa mama .mmOH mmmu nmmn mmsa assumeou as man IH>HQ endow .moz m AmoOHHHqZV museum: wsflxma ma mmHuH>Huos Hamzu waaudawa oOHuwH unmoom madam uom cocoons oaoodH rmwwmq .wafioamdam OHHQDQ pOuOHoEOO hauaoomu m>m£ mmouo macaumauomms coca was mmofl>mm waHHHouuooo maufim «Ham: HZMZHmeZH 3HanmMHz4m N magma . a a. ‘u l I. h. 15 The officers of credit unions are bonded against absconding. The management is often not very qualified since the officers are se- lected from within the group. If the credit union is a very large one, it would probably benefit from employing a professional manager. Life Insurance Life insurance is usually considered part of every good finan- cial plan. This can be small or large to fit each situation. There should be at least sufficient to cover death costs, taxes and any debts there are apt to be at this time. If there are dependent children, carry enough life insurance to support them through high school in case of disability or death. A straight life policy with an income rider or decreasing term insurance is a good plan to follow. Table 3 on page 16 shows seven ways to protect a family with insurance. If you have dependents you may want to follow Cobleigh'szl -sug- gestion of having three times the amount of your gross annual income. _ Due to the inflation in our present day economy a larger total is now becoming more common. Also, it is obvious one dependent may not require the same amount of insurance protection as five. So the amount of insur- ance must be fitted to the needs of the individual situations. .Again life insurance cannot protect you against inflation, so other investment forms are probably wiser. Each premium builds up the investment program. The cash sur- render value or loan value also increases each year. Each policyholder 21Cobleigh, loc. cit., p. 36. 16 .au .a .omma .usgas>oz .mosaa unawaaeo .moaaoo waaumaxs scum .08 s can msvaaodH ..s:as> suds Hash mucus oco.0aw “span asnu .mum on no saossa saoosa maaasm 0am www.mw .asn you .oaxo0aw ooo.m owa .03 s ooam 000.0a auaB smaa saogz coo.mw asvau . osnu «mph om mo saboca seooza haaasm ouw mm¢.am .asn pom .oE\00am oom.~ waa .08 s 00a ooo.mm nuaz smaa saons .mum ON «0 saooua mace Bhsu weasuoo .asn you .oa\00aw oqm.a we .08 s oaa sooc moaaom saoooachaaasm asaaoa hoaaom woaumaxs .muh on mo woaumaxs mom “spam no ssas> .asn Mom .oa\00am com ca .08 s cm soon saooaauhaaesm caw .mus oa ..oa\OOaw no ooo.oa «eon momma ca ecu maaauoa .aus om..oa \ OOH» ono.a «ca ooo.o~ mace anus» oa Baa Buss mushroH massm om How waaauoa names a ecu» oem.a mm ooo.o~m sac: ans“ Hams-o~ mass» on How omo.mw auaoa u ceam coo.nm emu» sac: ooo.ouw suaa mace: ms>aa s: ma msav s5 ma .uou .uhrou .>s maussm. musuooasu unsasanso ¥ nussaa_ausa n>ss mo smasu no vsmsn .msaas> was unsahsm hum Haas moaaoo sSu muss» 0N us>o unsahsm was doauusuouo nose manu shop s: o o o omshH—n 05 NH .mHn—flboflflmh “VG“ OHQHUHONrfiOO a.“ 00G“ .usasom unsnsum us ssdauaoo .vasm susga .mpdsva>av usnu season was sudaaxoumos sns .msacsaaos asks .saooaa usnu sva>ouo ou mun uswafi on whoa os>sm sud snsm .uasao sEOOdanhaaasm moan: nsom .msasaaom ascoauas>uou moan: ssunu .voausm ussu wo saunas; snu pom saosaa nucoa s oon s>sn masons maaasm can msusmam s: .mussh om.uxso snu casuaa saau has asap s: MH .nu ma swoon sun «0 was: ssh ‘3 NAHZmm m manna ‘1 n 1) 17 should select a beneficiary, a contingent beneficiary, and the settlement options. The payments may be in a lump sum, installments or life payments. Some life policies have a provision for converting the policy to an annuity whereby the policyholder may receive income for life or for a certain num- ber of years. Straight Annuity Next is the straight annuity which many people like because it can guarantee a definite income for life. An annuity may be purchased in one lump sum or by the installment plan. The payments may start at any time elected--immediately or some time in the future. A medical is not required. The cost depends on your age and sex. Since women live longer than men, they pay a higher premium. Annuitants often live longer than other people. It is thought this may be true because they do not have an anxiety over income. The disadvantages to annuities are that they are not marketable or convertable into cash and they are vulnerable to inflation. Variable annuities have been developed to meet this need. ChangingTimes22 shows the amount of money you should save each year to have $10,000 at age 65. They also show the cost of annuities. Following is the amount you must set aside each year to have $10,000 at age 65. The sums are approximate and assume that you will reinvest all interest or dividends received, without deducting for income taxes. These figures are based on annual compounding, though many insti- tutions or securities compound semiannually or quarterly. 22Changing Times, March 1958, pp. 9-10. ‘1 r» 5 Your present age 50 45 4O 35 30 18 Yearly saving that will total $10,000 at 65 if interest is 3% $540 370 275 210 165 4% 7% $500 , $400 335 245 240 160 180 105 135 70 Here's what it costs to include an annuity in your retirement plans. These are sample rates--premiums vary some from company to company. Immediate annuities. For an income of $1,000 a year to start at once, a man aged 65 will pay a single premium of: $12,120 if all payments are to cease at death, when- ever it occurs; $13,200 if payments continue at least ten years, even though purchaser dies sooner; $14,250 if payments continue until the total equals premium paid, even though purchaser dies sooner. Retiring annuities. For an income of $1,000, paid in monthly installments beginning at age 65 and continuing for life only, a man will pay annual premiums of: If bought If bought If bought If bought If bought Bonds Bonds are one at at at at at age 50, $772 age age 40, $402 age 35, $312 age 45, $539 30, $249 less dividends. less dividends. less dividends. less dividends. less dividends. of the oldest forms of investments. They represent a solid, safe and conservative form of fixed investment. The interest paid is consistent with the type of investment. When buying bonds you become a creditor. Bonds represent a long term promise of the government or corporation to pay back a fixed amount ‘J 1 19 of money at a certain date (maturity). Often bonds have interest cou- pons payable every six months. Cobleigh23 feels that no more than ten or fifteen per cent of the total market value of the portfolio should be in bonds. Bonds are purchased for stability and income, not for appreciation. U. S. Bonds The United States savings bonds are the safest and perhaps the most widely purchased form of bonds. The interest rate is three and three-quarter per cent if held to maturity. )All series E bonds, old or new, now carry an automatic extension privilege; they'll keep paying liberal interest for ten years beyond maturity."24 United States savings bonds have certain advantages like having the wealth of the nation for the guarantee, being able to purchase through payroll deductions. The payroll savings plan is the backbone of the savings bond program. The small saver finds this to be a convenient method of saving and complete protection from possible loss that might occur in other securities. The bigger investor, both individuals and institutions, have shown a trend away from U. 3. bonds and toward secur- ities that give a bigger yield.25 Sometnmes these larger investments have been made in United States bills, certificates or notes.26 These pay a higher rate of interest and 23Cobleigh, loc. cit., p. 79. 2422213, November 30, 1959, p. 103. 25U. 8. News and World Report, August 3, 1959, p. 91. 26Sylvia Porter, Notes and Certificates, Bills, Bonds Explained, (The Hall Syndicate, Inc., 1960). l) I) u 20 mature in less time than the United States bonds. These are all avail- able from your banker or broker. The U. S. bill matures in less than one year. The longer the bill is held the higher the rate of interest. This varies from 4-4 3/4%. These bills are always issued at a discount from the maturity value. This discount represents your income from the bill. U. S. bills must be purchased in amounts not less than $1000. U. S. certificates are generally issued at par; they also mature in a year or less and are not sold for less than $1000. The amount of interest to be paid is on the face of the certificate and the rate for the ones that mature in a year is nearly 5%. Usually the certificates have coupons, enabling you to collect the interest as the certificate matures. The U. S. note has a maturity date longer than one year but shorter than five years. Theseare usually issued at par and carry coupons with a specified interest rate that may be collected semi-annually. The "Magic Five" sold last October were notes with a 5% coupon. These are ‘ 27 due in 1964. Each six months the owner gets $25 per $1000 of notes. Municipal Bonds Municipal bonds have a good safety record. These are tax-exempt from federal income tax, so in the past wealthy people have been the buyers. Now many people in the middle income group are buying these. A disadvantage of these bonds is that you cannot cash these at any tflme and be sure of getting your principal back. 271pm. 21 There are four basic kinds of tax-exempt municipal bonds. (1) The general obligation bond--these usually carry the highest rating be- cause the full taxing power of the unit issuing the bonds is behind it. (2) Revenue bonds are issued to finance particular projects like toll roads, bridges, sewer plants and transits. (3) Special assessment bonds are secured by special taxes on the taxpayer who benefits from the pro- ject. It might be streets or sewers. (4) Housing AuthOrity bonds may be general obligation bonds or revenue bonds. These are issued with the Federal Housing Authority, so have the backing of the Federal Government.28 'Municipal bonds are rated by experts and these should be used as a guide for buying. Moody's, Standard and Poor's and Fitch are considered reli- able sources. Table 4 on page 21 compares the yield from tax-exempt bonds and the yield from a taxable bond to give an equal return. Due to an increase in traffic, more connecting roads, and better profits the interest rates of the toll roads have increased. "The highest quality issues are undoubtedly the New Jersey Highway Authority (Garden State Parkway) and New Jersey Turnpike bonds and the Pennsylvania Turn- pike 3k 3. Yields on the two latter, however, are too low to make these obligations attractive."29 Corporation Bonds The corporation bond is another investment to consider. The value 28Leo Barnes, "Your Investments," American Research Council, 1959, p. 105. 29"Toll Road Bonds Return to Grace," Financial World, JUIY 27: 1950: p. 5. 22 .0.e .oesa .oa seeseeem .eapoz Heaoeeeam .0soasuno assess sou cu sanuoaamms usxosnn saoooa snu mean: was o3u ha saooca sansxsu 0da0a>av 00 uvasah unsas>asvs team has monnusu uaaofi moaaam mushsmxsu psauusa “saunas“ susudmsm moaaam mushsaxsu ou sanmsaamms sud osons usuqm asuoz 00.00 «0.50 00.00 50.a0 00.00 aa.00 00.00 a0 . . . . . . . . . . . . . . . . . . . . . a 000.com 00.00 00.00 00.00 00.50 00.00 00.00 00.00 00 . . . . . . . . . . . . . . . . . .000.000 1 000.00a 00.00 00.00 00.00 00.00 N0.a0 00.00 50.50 00 . . . . . . . . . . . . . . . . . .000.00a n 000.00a «0.00 00.00 55.00 00.00 00.00 00.00 0a.0N 50 . . . . . . . . . . . . . . . . . .000.00a n 000.00 0a.0~ 00.00 00.00 00.00 00.aN a0.0~ 05.0a 00 . . . . . . . . . . . . . . . . . .000.00 a 000.00 00.00 .00.- 00.a~ 05.0a 00.0a aa.5a 05.0a a0.. . . . . . . . . . . . . . . . . .000.00 r 000.05 00.0N 00.0a 0a.0a 00.5a a0.0a 55.0a 00.0a 05 . . . . . . . . . . . . . . . . . .000.05 a 000.00 00.0a 00.5a 00.0a 00.0a 00.0a 00.0a 00.Na 05 . . . . . . . . . . . . . . . . . .000.00 T 000.00 00.0a 0a.0a 00.0a 00.0a 00.Na a0.aa a5.0a N5 . . . . . . . . . . . . . . . . . .000.00 a 000.00 a0.0a 05.0a 00.0a 0a.~a 0~.aa 00.0a 00.0 00 . . . . . . . . . . . . . . . . . .000.00 a 000.00 00.Na 0a.Na 00.aa a5.0a 00.0a 00.0 50.0 00 . . . . . . . . . . . . . . . . . .000.00 I 000.00 mm.aa ma.aa mm.oH aw.m a~.m 00.0 00.5 «e . . . . . . . . . . . . . . . . . .ooo.~m - coo.eu mm.oa am.oa ea.m 0a.m 00.0 mm.a «m.a mm . . . . . . . . . . . . . . . . . .ooo.o~ - ooo.- m~.oa 00.0 mo.m «0.0 nm.a mm.a «0.0 on . . . . . . . . . . . . . . . . . .ooo.- - ooo.o~ 00.0 00.0 a0.0 00.5 00.5 a0.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0N : 000.0a 00.0 00.0 00.0 00.5 00.5 00.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0a n 000.0a 00.0 00.0 00.5 00.5 00.0 0a.0 00.0 50 . . . . . . . . . . . . . . . . . .000.0a a 000.0a 00.5 00.5 «0.5 00.0 0a.0 05.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0a r 000.NH 00.5 00.0 00.0 00.0 00.0 00.0 00.0 00 . . . . . ... . . . . . . . . . . .000.~a u 000.0a 00.0 00.0 00.0 00.0 00.0 00.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0a n 000.0 00.0 50.0 a5.0 00.0 00.0 00.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0 3 000.0 00.0 05.0 a0.0 50.0 05.0 00.0 00.0 00 . . . . . . . . . . . . . . . . . .000.0 T 000.0 05.0 00.0 0a.0 a0.0 00.0 5a.0 00.0 «N . . . . . . . . . . . . . . . . . .000.0 n 000.0 sme.n Nam.0 aoo.m ame.e 000.0 aeo.0 ama.m New . . . . . . . . . . . . . . . . . .ooo.~ a - o a wasaw umaz voom sanwxsa s snousm unsasbandm o< s0a>onm OH susm seoucu sansxsa $00.0 $00.0 $00.0 $05.0 $00.0 $00.0 $00.0 st ea anon oessxm-xua scum pasaw ma mvasaw sansxsa .m> unasxm de wasaw muzrosa s>um 00:00 unasxm st e «apes 23 and safety of these depend on the companies property, credit and earning power. Again it is best to follow the rating of a recognized investment service. Corporations like to use bonds for financing because they are an expense of operating so are fully tax deductable to the corporation. Preferred and common stockholders must be paid after all other costs have been paid. Many corporations are issuing convertible bonds because they are popular with investors and can be floated at a somewhat lower inter- est rate. Also, bondholders voluntarily convert their bonds to common stock periodicallymdthis reduces the bonded debt gradually. Corporate bonds may be mortgage bonds. In this case the company pledges a specific piece of property to back the bonds. Debentures have no collateral backing. Railroads often use equipment trust certificates for financing freight cars. Corporations always have a trustee who is supposed to see that a bondholder's rights are protected. Preferred Stock Preferred stocks are another form of invesmment. When you buy stocks you become a part owner of the company. Preferred stockholders receive dividends before common stockholders. Usually preferred stock- holders look for additional features. Some special features might be cumulative, debt-free, noncallable or convertible. A cumulative preferred stock means that if a company didn't have sufficient funds one year to pay the dividends, these cumulate till the next year and must be paid ahead of common stockholders. Debt-free preferred stock means the com- pany does not have any outstanding bonds or long term debts. Noncallables mean that the company cannot call these in when the interest rates drop 24 and refinance them. Convertible preferred stock means it is convertible to common stock at the owner's option. Summary The above items conclude the types of investments for fixed incomes in this paper. These various items should be selected by each individual or family in the light of their goals. MBny extremely con- servative individuals never get beyond this step. Often this is due to lack of knowledge. Those persons who may be conservative, but realize the benefits of variable income have hardly started their investment portfolio at this point. Variable Income Investments Variable Income Perhaps the real security comes to the people who choose the investments for variable income. These are most commonly found in real estate and common stock. The fixed securities just discussed are known as debt securities. They represent a promise to pay a fixed amount of dollars. The variable securities are known as equity securities; they represent ownership or partial interest in real or personal property. 30 the function of investments is to conserve capital According to Putnam and safeguard its purchasing power. During periods of prosperity, indus- try and business prosper. Prices of commodities and wages rise. The cost of living increases while the purchasing power decreases, so the dollar buys less. During periods of depression or recession the opposite of this is true. Since 1949 our country has been in a period of creeping inflation. To maintain your purchasing power you should select securities 30Putnam, loc. cit., p. 104. L2 25 that will increase in dollar value and provide an income that will increase to make up for the loss of the purchasing power. Common Stock The free enterprise system of our country makes it possible to start a small business and build a large corporation. Much of the cap- ital of these corporations is supplied by the sale of common stock. By pooling the resources of many stockholders new ideas and products are deVeloped and progress continues. These corporations form the founda- tion for our national economy. The stockholders are the support for these business institutions. By purchasing stock you assume the risks of gain or loss of the company. Investments in common stock have two advantages over the fixed income securities. "First, average income in the form of dividends was markedly greater as a percentage of cost than was obtainable on high grade fixed-income securities. Second, it was found that common stocks enjoyed a long term appreciation which was not available to the holder of bonds or preferreds."31 Real Estate Many people have realized sizable profits from buying vacant land, then reselling it at someifuture time. The fast developing sub- urban areas of the last decade have used many acres of land that many times had never before yielded a profit. Industrial expansion has also used much vacant property. There are still some rapidly expanding areas in our country where this will continue to be true for some time. 31Douglas A. Hayes, Appraisal and Management of Securities, (Macmillan, 1956), p. 35. 26 Homes are owned by 60% of the families in the United States32 and represent the most widely held investment in our country. Often the cost of owning a house is less than renting because mortgage inter- est and real estate taxes are deductable from the Federal income tax. A factor to consider when buying a house is its resale value. Conditions change and for one reason or another houses are resold. Size, surrounding neighborhood, conditions and location are some of the items that influence resale value. Two family houses are thrifty and can be used to reduce the cost of living for the professional woman. Income property offers some tax advantage. Depreciation and operating expenses can be deducted from the earnings. Income property can be multiple units. These might be duplex, triplex, fourplex. As the units increase more skill and know- ledge is required for a profitable return. 33 summarizes some of the qualities of real estate as an Bradley investment by saying (1) the risk is greater than series E bonds, insured deposits or shares, but less than corporate securities in the long run, (2) the return is not fixed and you should not expect more than five per cent, (3) it is not automatically converted to cash and you must accept current market value, if sold, (4) it is a hedge against inflation and (5) it does require attention. If it is rental property it must be main- tained and tenants kept so income continues. Also real estate is subjected to changing values and you may or may not want to sell as economic conditions change. 32Willia'm Nickerson, How I Turned $1,000 into a Million in Real Estate--in My Spare Time, (Simon and Schuster, 1959), p. 2. 33Jo Bradley and R. Wherry, loc. cit., p. 347. 27 Institutional Investing Some individuals do not want or have the time to study the complex problem of selecting their investments. They may have institutions do this for them. This might take the form of a variable annuity, life insurance stock, closed-end or open-end trust companies. The primary purpose of any investment company is to pool the funds of all of the investors and invest this money in a diversified list of securites. These investment companies have professional managers who give continuous supervision to the investments. Variable Annuity The variable annuity is a method of building a variable income through investments. Premiums are paid to purchase units in a variable annuity. The company takes a percentage of this money for overhead and the rest is invested for the most part in common stock. The purchaser is given a fixed number of units for life or some designated period of time. If the annuity units increase in value, the payments would increase. 80 that during periods of inflation the purchasing power of the dollar would be more equalized. This investment is intended for added protection rather than replacement Of a fixed annuity. The variable annuity is a little more of a risk since it is an inveStment in common stock, but the return is a little larger, usually 4 or 5 per cent. The variable annuities are safeguarded by34 (1) having diversified investments--both by firms and industries, (2) having only a certain per- centage of any one company‘s stock, (3) buying over long period of time} 34Bradley and Wherry, loc. cit., p. 419. a... 28 to have dollar averaging and (4) havingastaff of competent analysts. This is another example of where the individual investor is relieved of constant supervision. CREE (College Retirement Equities Fund) has been in,operation for sometime. This allows TIAA.members to invest up to fifty per cent of their premium in CREF. The CREF premiums are used to purchase common stock; at the same time TIAA.premiums are used primarily to purchase bonds and mortgages. So this gives protection against inflation and deflation. The annuity units are paid each month upon retirement. The value of the units are figuredeach year. So the retirement check varies from year to year depending on the earnings. There are several methods to choose from in selecting the way you and/or your beneficiary will be paid. Recently insurance companies have been trying to get permission to sell variable annuities. The United States Supreme Court says they must be regulated by SEC. The states in which the insurance companies are domiciled must also give permission. Six states and the Districtaof Columbia may now sell variable annuities. Life Insurance Stock Life Insurance stock should not be overlooked as a form of invest- ment for variable incomes. Due to the continued need for this type of protection, an investment in its capital structureiis considered safe. Insurance companies are regulated by state law as to how they can invest their assets. Much of their money has been invested in residential mort- gages. Profits and growth in assets per share are steady. Life insurance companies are known as "stingy dividend payers." They usually plow back 29 80 to 90 per cent of their earnings thus compounding profit and assets per share.35 Table 5 on page 30 shows the earnings and other financial data of life insurance stock. These can be excellent long term investments to give stock appreciation. Closed-end Trust The closed-end companies are another form of variable investments. These companies have a fixed amount of shares to sell to the public. These shares are bought and sold over the major security exchanges. The regular brokers fees are charged to buy or sell. Often these shares can be purchased at a discount. Kiplinger36 states that among other reasons for this (1) they do not have an aggressive salesman creating a demand and (2) there is no fixed liquidating value. Often these companies use their record as a means of advertising, so want only the best performance. 37 reviewed four closed-end companies in August, 1960 and thought Kiplinger they would make attractive investments, when they were available at a discount. The companies are Consolidated Investment Trust, The Lehman Corp., Adams Express Co. and Tri-Continental Corp. Broker's commissions and fees are charged for buying or selling. Shares selling at the above mentioned discounts are not always bargains. Sometimes they represent leverage (effect of outstanding debt on asset value) and unsatisfactory management. Besides the broker's fee the 35Barnes, loc. cit., p. 41. 36Kiplinger, Changinginmes, August, 1960, p. 15. 37Ibid. 'Table 5 OUTSTANDING MARKET PERFORMANCE* 30 During the 10 past years and more the market performance of the insurance stocks has been outstanding--sound1y supported by the growth in underlying value as previously illustrated. January, 1947 June, 1958 $1000 invested in the shares of Commonwealth Life $11,280 $1000 invested in the shares of Conn. General 13,675 $1000 invested in the shares of Continental 15,631 $1000 invested in the shares of Franklin 20,042 $1000 invested in the shares of Lincoln National 13,241 HOW $19,909.00 INVESTED JANUARY 1, 1951 WOULD HAVE GROWN Following is a tabulation of comparative performance of 20 selected invest- ment grade stocks out of a list total of 100. Stock Market Value Cash Div. $10,000.00 Dec. 1957 Paid Produced Franklin Life $131,450.00 $3,986.00 $135,435.00 Colonial Life 125,822.00 4,726.00 130,548.00 Commonwealth Life 70,822.00 3,660.00 74,482.00 Goodyear Tire & Rubber 56,505.00 7,720.00 64,225.00 Kansas City Life -56,700.00 1,944.00 58,644.00 Lincoln National Life 45,055.00 1,998.00 47,054.00 Connecticut General Life 44,321.00 1,627.00 45,948.00 General Electric Co. 37,085.00 6,241.00 43,326.00 Standard Oil Co. of New Jersey 32,618.00 7,791.00 40,409.00 Eastman Kodak Co. 30,054.00 4,117.00 34,171.00 General Motors Co. 21,728.00 7,913.00 29,641.00 E. I. duP ont de Nemours 20,989.00 4,332.00 25,320.00 03. Fidelity and Guaranty 17,729.00 3,714.00 21,443.00 Transamerica 16,082.00 4,733.00 20,815.00 Corn Products 15,784.00 4,249.00 20,033.00 Sears, Roebuck & Co. 14,720.00 3,733.00 18,453.00 Bank of America 12,593.00 4,586.00 17,179.00 American Telephone & Telegraph 11,089.00 5,146.00 16,234.00 * Frank Helm, "The Life Insurance Industry," NAIC Bulletin, September 1959. 31 second cost of the closed-end company is the annual management expense. This expense is deducted from the income before any dividends are paid. This usually averages.607..38 Open-end Trust The open-end companies are often referred to as a mutual fund. These companies continuously offer new shares for sale at net value plus 7 to 9 per cent sales commission or loading charge. The mutual funds go up and down with the market. Funds can be selected for (l) conserva- tive securities, (2) balanced funds or (3) a broad list of common stocks for greater capital gains and larger dividend returns. According to Cobleigh39 some criteria for mutuals are to know (1) how much income was distributed to shareholders over the last ten year period, (2) how much was paid out in capital gains, and (3) how much the shares did or did not appreciate over a period of years. The mutual fund accumulation plans have become more popular; this is probably due to the investing service they provide. The accu- mulation plans have several alternatives. One is voluntary, which is an open account used at the pleasure of the purchaser. Usually the first payment is high and the others are made to suit the individual. Another form of accumulation is the contractural form. In this you "contract" to invest so much money over a certain period of time. These plans may or may not have a penalty clause for non-payment. The pre-paid penalty 380. Russell Doane and Edward J. Hills, "Investment Trusts and Funds," American Institute for Economic Research, p. 17. 39Cobleigh, loc. cit., p. 218. 32 permits the mutual fund to take out up to 9 per cent of the total con- tract during the first twelve to twenty-four months. This is frequently called "loading" and helps prevent the new investor from abandoning his long time financial goal. According to Straley40 this fee usually averages 7.5% of the offering price on small purchases and less on large purchases. Mutual funds also charge .25% per year for administration expense and .5% per year for management fee. Straley41 feels this is not too much to pay for professional investing. Some mutual funds have withdrawal plans that can be substitutes for the fixed or variable annuities. As the names‘indicate the fixed or variable cash amounts can be withdrawn at retirement age. This can be effective after following an accumulation plan for some period of time or by a lump sum investment in the mutual fund of your selection. Barron's publish mutual fund records quarterly. This shows the net asset value per share, the dividends per share and the distribution of capital gains. Financial World also keeps their readers informed about mutual funds. Table 6 on the following page shows the performance of some leading mutual funds. The chief value of mutual funds is the diversification they afford the small investor and the management skill of their leaders. So far, mutual funds have enjoyed a market rise and real management skill will only be tested when there is a prolonged decline in the market. The above methods of investing represent selection of an insti- tution and then you rely on their judgment for managing the investment. 40John A. Straley, What About Mutual Funds, (Harper and Brothers, 1958), p. 8. 41Ibid. k..." L .00 .a .oema .ow muepeen .namom,qoH .um susum M“ 55.0 0.00 05.0 00.0 00.0 00.0 00.0 . . . . . . . xusau was mas>su0 .usvvsom can” mOmH ”wow N‘VOO ”H00 qNoo OHOw .0...0.0.0.0o0o000000000900 OvaD-m HomaOflm 00.0 0.5 a0.0 00.0 00.0 00.0 00.0 . . . . . . . .xOOum usauausosm Hsaoausz 00.00 0.50 a0.00 00.0 00.0 00.0 00.a0 . . . . . . . . . . . muoums>oH auaoausz 00.00 0.0 00.00 00.0 00.0 00.0 00.0a . . . . . . . . . . . omega ums>oH .mde 00.50 0.00 00.50 00.0 nu 00.0 05.0a . . . . . . . . . . . . . . .0050 unsung 05.00 0.00 05.0a 00.0 05.0 00.0 00.00 . . . . . . . . . . . . . . 0IM sooumhsm 00.00, 0.00 00.0a 00.a 05.0 00.0 50.00 . . . . . .soansa< mo hosmaoo unsaums>oH 0a.00 0.0a aa.0a 05.0 50.0 0a.0 00.0 . . . . . . . . . snoums>a0 ususuomnouoH 05.0 0400 a0.0 00.0 00.0 00.0 00.0 . . . . . . . . . .mHOums>aH auuosasvsom 00.00 0.00 00.00 00.0 00.0 00.0 0a.00 . . . . . . . . . . . . . .0050 huafisvam 05.00. 0.0 05.00 00.0 00.0 00.0 00.00 . . . . . . . . . xuoum 090300 was sousm 00.00 0.00 0a.0a 00.0 00.0 00.0 50.00 . . . . . . . . . . . . . . 00:0 mnmmsn0 00.0a 0.aa 00.00 0a.a 00.0 00.0 00.0a . . . . . . . . . . . . . .0050 snsss0s0 00.a0 0.00 H0.a0 00.0 50.0 0a.0 00.0 . . . . . . . . . . . . . .0050 Hmoaasnu 00.00 0.5 00.0a 50.a 05.0 00.0 00.00 . . . . . . . . . . . . . . 00:0 xooafiom 00.00 0.5 00.00 00.0 00.0 00.0 00.0a . . . . . . . . . . .maaums>nH .u0 cecam 00.“ a 0.00 00.0 a mm.om em.oa 00.00 00.0 a . . . . . . . . . . . . .pepm esusaaamm< 00200 00000 00.00 0.0 00.0a 05.0 00.0 50.0 05.0a . . . . . . . . . . . . . 00:0 Hasnsuanz 50.0a 0.0 00.00 00.0 00.0 00.0 00.00 . . . . . . . . . . . . .0050 doumoaaasz 00.0a 0.5 5a.0a 50.a 00.0 00.0 50.00 . ... . . . . . . . . . .sas>sum usvvsom 00.0a 0.0a 00.0a 00.0 00.0 00.0 00.0a . . . . . . . . . . . . . . .0030 amousm 00.00 0.0 00.00 00.0 00.0 a5.0 00.00 . . . . . . . . . msauannosm svazrooausz 00.00 0.0 50.00 00.0 00.0 00.0 50.00 . . . . . . . . . . . . . .msahwmnmaaooq 00.00 0.0 50.00 00.0 00.0 a5.0 00.00 . . . . . . . . . . . . vussom was cousm .00.0 0.0 00.0 00.0 00.0 00.0 00.0 . . . . . . . . . . .ums>nH nuHsssooaaoo 00.50 0.0 05.50 aa.0 00.0 00.0 00.50 . . . . . . . . . . . . . . .0030 acumom 00.0 0 0.0 50.0 0 00.00 .00.00 00.00 00.0 0 . . . . . . . . . . . . . 0 oounmoomusx< ease mm\00000 eeaeu .oeH mm~am\~a mnzam amoz asuoa aquamso .ums>dH s=Hs> uososm 000a usnm< usmm< 002 002 00050 aesuszwmmaossA snu mo soomauowusm 0000 00¢ 0200 a<0002 0<3 HMMM¢2H0000 0 sandy 34 The possible advantages to using this method according to Barnes42 are that you probably (1) start with better selection of securities, (2) have better supervision, (3) have more effectiVe management and improve- ment and (4) have freedom from care. The disadvantages are (1) you pay more since you buy this expert management although this should be compen— sated for in better earnings, and (2) there is less flexibility to meet your personal desires. Individual Investment plans Monthly Investment Plan Many individuals prefer to do their own investing. This may be done periodically--monthly or quarterly or some other period of time. If you can afford some amount monthly, you can take advantage of dollar averaging which ignores fluctuations of the market. The monthly invest- ment plan was devised by the New York Stock Exchange to help the small investor start investing in the stock market. As little as forty dollars can be invested monthly or quarterly. You can select the stock to be purchased and your broker will buy the shares and/or fraction of a share your payment will buy. This process is repeated with each payment. It should be used for long term investing, not a get rich quick system. "On the first day MIP was available, 283 orders were placed with 55 mem-- ber firms of the Exchange. . . up to the end Of 1957 the 65,000 plans then outstanding had accounted for the purchase of about 2,000,000 shares 43 of stock with a market value of some $75,000,000." Brookings institution 42Barnes, loc. cit., p. 10. 43Straley, loc. cit., p. 124. 35. showed in their 1952 survey that of 6,500,000 people who own stocks of public corporations, 1,220,000 of these had an annual income of less than $4,000.44 The regular commission may be charged. This is six per cent on less than one hundred dollars and one per cent plus three dollars on more than one hundred dollars with a.minimum charge usually of six dol- lars or as agreed. Purchasing larger dollar volume of shares quarterly will cost less than smaller monthly purchasing. A broker’s fee decreases as the dollar value of shares purchased increases. The monthly or periodic investment plan takes advantage of dollar averaging. This means buying the same security at regular intervals over a period of time. Securities do fluctuate from time to time. This plan gives you more shares when the price is low and fewer shares when the market rises. This method is contractural but can be cancelled at any time. There are no fees or penalties. The brokerage company may cancel your agreement if you miss as many as four payments in a row. The firm.may keep your shares and reinvest your dividends if you so elect. This helps to build your net worth faster. Following are two tables of MIP favorites. Table 7 shows six- year market performance of 20 MIP favorites. Table 8 shows 50 stocks most popular with MIP investors. 44Brooking Institute Survey (cited by Straley, op. cit., p. 125. 36 .0a .0 .000a .nseasss0 .smasnoxm s00 .muaams no svos0a>av xoouu nom usumamv¢ s .msoana undH can wsacsmo assaysn ssosnsmma0sks .soa mam Ewan mmmauemma awesome sunmnommanms .0000 .e nones>oz espouse mooann 0000* m\m 00 + e\a mm «\a me nm\n mu mxa we mm\a m0 . .A.maamov .oo aao enmenmnm m\m «a + «\a ma N\a an «an «\a an um\a an . . . . . . . . .nnoo amass; m\a mm + m\0 00 m\a 00 «Na m\0 me man . . . .mnoo nonsense amnsams «\a on + «\a me om me\m an 0\a mm me\n mu . . . .oo masseuse emuanman .,~\a maa+ m\a man e\a men mm\0 am «\a ana ue\m mu . . . .mnx a .m:: muomeneaz m\a on +. e\a an on me\m an me «man an . . .mnoo .00000 a .amn .noo «\a 00 +. man an mm\a me n~\a ea mm\0 00 mm\m 00 . . . ..oo amoaasnu penance: m\m mm + «\m.am man we mm\0 ma m\m on ne\a on . . . . .oo 0 nunnsom nnnsm m\0 mm + «\a mu «\m on me\m «a 0\a Ne mmxa ma . . . . .unn ..snoum newsman e\a a0 + «\a me «\a 00 «\a «a an «\a mu . . . nuansae no .mnoo enema e\m nu + m\a mm mm mm\a on me\a 00 ne\a an . . . . .oo 0 A.mneov nonamm mxa mmm+ eaa man was me\m me 000 nm\a me . . .mmnaEOnz mnsnannm a.mna m\0 on + an m\0 ma .00 mm .00 . . . .oo any a any eneansa< e\a ma + on «0 me\m ea exm em nexm em . . . .oo ansaonesm enaaaaem - «\a on + 0\a em 0xn mu sm\m e mxn mm mexm e . .. . . . .nnoo mama seesaw ~\a «a + m\m an mwa an m\Muma 0\m we mxm 0a . . . .nnoo amheonamnoo-ann 00 + m\0 00 me mm\a mm «\a me new . . .A.n.zv .ou aao mneenmem «\m an + mxm me w\a mm nm\a on «\a 00 mm\m mm . . . . . ..oo amuaameo son m\0 «0 + ,e\m 00 0x0 am mmN e\m em mm\a mm . . . . .oo oanuuoam nmnonso m\a «m + m mmm m\m an” mm\0 man m\n 00m ue\m mam . . . . .nnoo snoop: aenunew 000a .00 .unem no imwfidfiu i .05 Hmm . ad 00HHHO>¢N mHE “CH. CN soanm vssnmm *umsA M0040. swam asmm Mooum nmmnne ensure emcee soaps usxnmz mmoanemma mmnnmosem mnz_o~ no mmozezmommmm nmxmzH mHzanHz mo msoanm nannlx .mnuns vastnssh suoso 0a msvononanrs n.e so o\n 00-0\m so mmon oo.~ onon . . . . . . .onnooonm s new onmnoon n.o m0 ~\n om-~\n mos onon as.“ moon . . . . . . . . noonn.nnonoooomoooz n.m me m\n 0m-~\n non anon oo.n mamn . . . . . .ooonnoeon noonnoan “mono m.e me oo-0\n mmx anon om.~m onmn .omnnn m monsoon mnnmpnneonom omnnm n.e on 0\n mm-~\n oox mmon 00.0 mnmn . . . . . . .nn .0 .z noon nmoasono 0.0 no omue\m on. emon o0.~ womn . . . . . . . . . . announce: omens o.e no o\m more\n oe anon oo.m omen . . . . . . . . . . . noonem noooom 0.0 an m\n on-e\n an moon oo.n onon . . . . . .oneooonm a one onoEnonmm o.m mm m\n mn-m\n om moon om.m nmmn . . . . . . . . .non a non noonnoan No.0 on --m\n nmx anon om.nn Namn . . . . . . . . .oooonomnn noonnoa< ononn oonnn coon-omon eonnm some ooonm unsosm swddm soanm sued ndocod vaum unsmsnm vsusoavaH omooon>no mozmon>no nae m>em anomz nemn mnuonm on o enemy is 1) Growth or Capital Gains Growth should be the investment aim of people who have a number of years before retirement age. Growth industries pay lower current, returns because they often retain as much as 55 to 80 per cent of the current earnings46 for reinvestment, thus making future prospects better. Some investors feel prospect and potential growth the most important fac— tors in selecting stocks. Growth stock steadily expands faster than our economy. Cobleigh47 says rate of increase in gross revenues and net earnings must be greater than our growth in population. In 1956 the United States was growing at a rate of 2.9 per cent a year. He also says increase in gross and net sales must be faster than the average rate of production in the United States. This has averaged 3 per cent per year since 1880. The advantages and disadvantages of growth companies are summar- 48 Some advantages are (1) if companies are selected ized by Leo Barnes. carefully and purchased at the right time, remarkable gains over a long period are virtually assured; (2) earnings are reinvested rapidly; (3) growth stock are tax favored since they come under the long term capital gains clause; (4) investors do not have to worry about daily, weekly, monthly or even yearly price fluctuation. The disadvantage is that the stock of the growth companies are almost always overpriced. The price sometimes offsets their superior future growth. 46Cobleigh, loc. cit., p. 145. 47Ib1d. 48Barnes, loc. cit., p. 38. D 41 Combination--(Income and Appreciation) Common stocks may be selected for both income and capital gains. These are sound, seasoned stock. They are not as stable as those in the income group but a rise in assets can be expected. Following is a page reproduced for comparison of various secur- ities. These issues are selected to meet different objectives. These ‘ selections are changed as economic factors Change. Investment Service Section SELECTED ISSUES Issues listed do not constitute all the recommenda- tions made from time to time, nor is it intended that holdings be confined to these securities. The selec- tions are not to be regarded as trading advices, nor as short term recommendations. Notice is given—- together with reasons for the change—when issues on this page are dropped from the list. Purchases Should be made only when they are consistent with the policies that are outlined on the Market Outlook page. Bonds These sound quality bonds are suitable for con- servative portfolios. Yield Standard Recent To In Poor's Price Maturity Rating Amer. Tel. & Tel. 2% s, 1975. . 83 4.26% A1+ Chicago, Burlington & Quincy 31,43, 1985 ............... 80 4.43 A Cities Service 38, 1977 ...... 80 4.72 A Colorado Fuel & Iron conv. 4%8, 1977 ............... 102 14.78 Bl+ Commonwealth Edison 2948, 19 9 ..................... 76 3.95 A1+ Grace (W. R.) conv. 314s, 5 ..................... 89 13.93 Bl+ Okla. Gas & Elec. 23/13. 1975. . 81 4.50 A1 Pacific T. & T. deb. 2971s, 1985 73 4.52 A1 S’western G. & E. 3‘4 3, 1970. . 88 4.77 A1 Vana7dium Corp. conv. 4348, 19 6 ..................... 90 14.72 B1+ Preferreds These issues are suitable for investment purposes. Financial Recent World Price Yield Rating American Sugar 7% (par $25) cum. ................ 29 6.03% A Assoc. Dry Goods 5% ’/r cum. 106 4.95 A Atchison, Topeka & Sante Fe 5% (par $10) non-cum.. .. 10 5.00 A Champion Paper $4.50 cum.. . 91 4.95 A Public Ser. E. & G. $1.40 cum. 28 5.00 B+ Wheeling Steel $5 cum. ..... 95 5.26 B+ Growrh Attraction of these issues is based on industry growth or improvement of company position. Yield is subordinate to price appreciation. r—Divldendsd- for Paid Recent I960 I959 Price Yield American Cyanamid $0.80 $1.60 54 3.0% Amer. Mach. & Fdry.. .. 0.65 1.07% 60 §2.2 Grace (W. R.) ......... *0.80 I"1.60 34 4.7 Owens-Illinois Glass .. . 1.25 2.50 102 2.5 . Sperry Rand ........... 0.60 0.80 23 3.5 Standard Oil of Calif.. . . 1.00 2.00 41 4.9 Sterling Drug .......... 0.90 1.65 57 §3.2 Union Carbide ......... 2.70 3.60 118 3.1 United Air Lines ...... ‘0.25 ‘0.50 28 1.8 Westinghouse Electric . . 0.60 1.05 53 §2.3 'Aln pold stock. tCumnt yield. [load on comet quarterly payments. Income Issues of this type should constitute the larger portion of common stock commitments held by the average investor. F-Dividendsfl So for Paid Recent 1960 1959 Price Yield American Can ......... $1.50 $2.00 39 5.1% American Telephone & Telegraph ........... 2.47 84 3.15 90 §3.7 Beech-Nut Life Savers. . 0.80 1.60 37 4.3 Columbia Gas System. .. 0.50 1.00 20 5.0 Consolidated Edison . . . . 2.25 2.80 65 §4.6 Endicott Johnson ....... 1.20 1.60 34 4.7 Family Finance ........ 0.80 1.60 29 5.5 International Harvester. 1.80 2.00 43 §5.6 Kresge (S. S.) ......... 1.20 1.60 31 5.2 Louisville & Nashville.. 3.50 5.00 57 §7.0 May Department Stores 1.65 2.20 52 4.2 Niagara Mohawk Power .............. 0.90 1.80 37 4.8 Norfolk & Western . . . . 3.00 4.70 93 §5.4 Pacific Lightin ........ 1.20 2.40 48 5.0 Peoples Drug Stores . . . 1.00 2.00 42 4.8 Philip Morris, Inc. ..... 2.70 3.00 70 €51 Singer Manufacturing .. 1.30 2.20 56 4.6 Southern California Edison .............. 1.95 2.60 63 4.1 Sunshine Biscuits ...... 3.30 4.40 90 4.9 Union Tank Car ....... 0.80 1.60 31 5.2 West Penn Electric . . . . 0.85 1.60 40 §4.2 Income and Appreciation These sound common stocks are satisfactory for larger portfolios, though not as stable as those listed in Income Group. Greater price volatility can be expected from these issues. v-ubividcnds’a So for Paid Recent I960 1959 Price Yield Allied Stores .......... $3.00 $3.00 51 5.9% Allis-Chalmers ........ 0.75 1.25 28 §5.4 Container Corporation . . 0.75 1.00 23 4.3 Flintkote Company . 0.90 1.75 36 §5.0 Glidden Company ...... 1.00 2.00 37 5.4 Middle South Utilities. . . 0.73% 0.93% 32 3.1 Mississippi River Fuel. . 0.80 1.60 31 5.1 National Distillers ..... 0.60 1.10 27 §4.5 Olin Mathieson ........ 0.75 1.00 39 2.6 Pepsi-Cola Company . . . . 0.70 1.25 44 §3.2 Stevens (J. P.) ........ 0.75 1.50 28 5.4 Worthington Corp. ..... 1.25 2.50 46 5.4 Yale & Towne .......... 1.12 1,4 1.50 29 5.2 43 CHAPTER IV CRITERIA FOR SELECTION OF INDUSTRIES ACCORDING TO OBJECTIVES Income Industries According to Leavitt and Hanson income industries are selected mainly for (1) safety of principal, (2) regularity of income, (3) market- ability,(€i)ratneof return and (5) balanced portfolio. Safety of Principal Safety of principal and income are closely related. All investors want to keep their capital and receive a return upon it. If the income payments are safe, these same earning powers give value to assets thus making the principal more secure. The cash dividend paid common stock- holders is paid in dollars at the discretion of the management. The dividend can be increased or decreased as the economic trend changes. A decline in the purchasing power of the dollar may be off set with an increase in the cash dividends, and visa versa. So common stockholders may have some protection against inflation. Regularity of Income Regularity of income can be thought of in different ways. Some people want this immediately so they select a stock that has paid divi- dends regularly for many years. Others may be more willing to wait a period of years and this could be illustrated by the people who purchased vacant land and kept it half a lifetime waiting for the value to increase. People familiar with real estate are more apt to use this form of invest- ment. Regular income can be attained by selecting stock that pay their ,4 44 dividends in different months during the quarter and pay a dividend regularly each quarter. By selecting three such stocks you may have a dividend check each month. Regular income stocks are often found in utility, food and tobacco companies where the consumer demands stay about the same. Financial World develoPed a portfolio of common stock investments to pay a regular income of $200 a month. These securities are conservative. Beside regular dividends these investments "offer relatively high quality, liberal yield and a considerable degree of 49 diversification." This portfolio is shown in Table 10 on page 45. Rate of Return The rate of return is called the yield. It is the rélation between income received and the capital invested. The return varies with the amount of risk involved. The more speculative the security the higher the rate of return may be. A low yield may reflect a high price due to greater demand for the stock or security. The stocks known as income stocks give a steady rate of return (or dividend). The growth stocks usually have a lower yield because they are putting their money into expansion. Marketability Marketability refers to the degree of ease with which a security can be converted into cash without the loss of value. The degree of marketability is affected by popularity, distribution and seasoning of the security. Stocks are more popular in a period of prosperity and bonds are more popular during period of depression. The more marketable the security the higher the price. 49"$200 A Month Extra Income," Financial World, July 13, 1960, p. 5. 45 cm on coma .oa sash .eaaoz amaocmaaa .mmmH CH UHdhiim .amnfiooon .uonfiouaom mash .aoaa21inmhz.muonao>oz .umnw34 .haz_.%aananoMIizaa oaaomamoa mazoz_< coma OH manoH a )Q 46 Balanced Portfolio The balanced portfolio is another criteria looked for especially for income investments. ”The objective is to have the highest possible income with relative safety. Bonds and preferred stock give a steady income with a fixed amount of dollars. The purchasing power may be more or less than when you purchased the security. In order to keep the portfolio more in balance during periods of prosperity the percentage of common stock may rise with inflation, if there is a depression there may be no dividends. A well-balanced portfolio shouki contain bonds, preferred and common stock. The common stocks should have some differ- ent types: perhaps these might be utilities, food,chemicals or banks. The smaller investor might find the easiest way to secure a balanced portfolio is by purchasing a balanced mutual fund, where the diversifi- cation is planned by professional managers. Most individual investors diversify through different industries and different geographic locations for further protection. ‘Growth Industries Criteria for selecting growth industries are important. January 1, 1960 Forbes used several performance characteristics to make their ratings. To rate the growth of companies they felt these questions needed to be answered. (1) How fast the company's sales increased the last five years? (2) How fast has the company increased its cash flow over the same five years? (3) Are the earnings growing as fast as the sales? (4) Is manage- ment making the stockholders equity grow? The management of any growth company must be sound and progressive. The management of a growth company often retains a high percentage of the 47 earnings to add to its plant and property to improve production and sales or develop new products through research and development. In the long run this may give stock splits--stock dividends which gives the stockholder more shares and increases the total market value. Growth stock should always be purchased with the idea of holding it five,ten or twenty years. Sales Growth For a company to grow it must sell its products by aggressive salesmanship. Through research and development programs new products are a result. Many times demand must be created through advertising. Growth in sales is sometimes raised through acquisition-of another com- pany. As sales increase the profits should show a steady increase. Cash Flow Cash flow is another way the rate of growth of a company is measured. Cash flow is found by subtracting from the current receipts the current cash expenses. The amount remaining is the cash flowing into the company's treasury before depreciation, depletion, amortization and cash reserve are deducted. This cash can be used for expansion, research and development or whatever management thinks is a wise use. Earnings The earnings must grow as the company grows. If sales have increased earnings should increase. Growth earnings sometimes show a set-back,but as a whole they must show a steady rise. Over a period \ of time the earnings should increase faster than the economy as a whole. 48 The gas and electric utilities especially in areas of increasing popu- lation have shown this steady rising growth trend. Growth in Equity Growth companies retain much of their earnings to use for plow- back. This can be used to buy property, build plants, buy modern mach- inery and equipment or for other assets. Through the use of plow-back to increase the assets directly or to develop new products by research, the equity of the company is growing. These should also be evaluated over a period of years, not one year. Measuring Growth. Besides these characteristics for growth industries, Forbes has other devices for measuring. One of these is for rating management. A perfect score is 100. Reproduced from page 24 of their January 1, 1960 issue is a chart which illustrates how their "yardstick of performance" works. lv‘ ,,._ 3;, “.... . '—._<;;zi‘2;:1:3’1~1,3_1’ .,-. .25; “.2834?" . 4. 4’ G ‘ kfiqx’ $33 ‘1‘". €25; ' 0’0 9.. 9:6 K099i 0.. :0 a 9 ,9 "I? o) . ‘ 'L, 9, 1 a, 4.10 (66.0%," "ks/$.33 [’0 $‘ 1 1,40%, “‘6 186:1,9 ’0’ $13, 09 {93/45 9‘) . ‘64” 9.. $0 $15,410 8°. 4: a 1:4 .4 a a use . on ire/i. 45‘s.”, ‘5- o . a. ., s. v- -. ., .0 . a °~. - e ., ,. c 'q. a ‘5 ‘90, .9 c; x (3 $14.00 ’zéfi‘g‘, “€46,451, '9! , .. ‘too‘q. Q 3'66. J $0 COMPANY .v 4).. '8 ° 0‘ ‘. 9‘ a, 1" 1’" ' 0° .’ Mr. IT. Est. 1353 a.” °’ + EASTERN Pennsylvanla‘ declined declined declined 0.4% 0 5.5¢ 1.8% 0.6% —22.1% 0 U .. New York Central" declined declined declined 0.4 6.6 2.4 0.7 3.1 0 85 Baltimore 8 0hie declined declined 3.5% 2.7 0 5.2 2.2 1.9 —12.4 3.5: . 85 POCAHONTAS Chesapeake 8. mm 0.6% 2.7% 1.0 5.1 32.0% 15.2 10.6 8.2 -—l3.0 1.8 5 Norfolk 8. Western: 1.6 8.9 9.4 2.8 0 9.6 7.1 8.4 7.1 18.3 S SOUTHERN Southern declined declined declined 4.1 — 10.0 7.0 6.6 3.7 0 j Illinois Central declined declined declined 1.0 — 8.4 5.1 3.5 —— 5.5 0 80 Louisville 8. Nashville declined declined declined 1.9 0 10.5 6.0 3.9 — 8.3 0 75 NORTHWFSTERN Northern Pacific declined 7.9 7.1 2.3 3.3 4.8 3.2 3.6 5.1 11.7 85 Great Northern declined declined declined 1.7 — 6.8 4.7 4.2 — 1.6 0 90 Milwaukee declined declined 5.5 0.8 0 7.0 1.6 1.4 — 5.2 17.6 80 CENTRAL WESTERN Southern PacillcT declined 0.8 declined 2.3 — 7.2 4.3 5.6 18.5 0 U Santa Fe declined declined declined 1.9 — 8.9 5.8 5.1 — 1.7 0 85 Union Pacific declined 3.4 1.9 4.2 4.8 10.2 7.6 6.4 — 6.5 3.4 80 SOUTHWESTERN ‘ Missouri Pacific declined 2.2" 30.7 6.8“ 0 10.1 2.7 3.2 ' 11.0 24.8 as}. J .l ‘Company only. TConsoltdated. VARDSTICKS OF PERFORMANCE ,,.. ,7 pt ‘..__,.. W" .flvfia“.; , we dz... - , . _ W‘rd‘ . A‘ o .1. an 7.3%,. . Wit-‘52- "a : V’ - . . 34 .~~._. .1 be? :1 a» . msti-cifltfii‘km“1456”?“ s. .‘ ” '* . " i’i‘imn-sce‘wsrmww .- ., - _. ‘ fl . .r v. "2‘ 'r'?’ ‘ . 4- All figures before October split. "Latest four years. tAll figures prior to merger with Virginian j“ ' 1v. . u D. I‘ u. A I I i. .a .. . £4. a . y " ... r __ .. . .l i... .. ... . . o. . .. . .a . .. I . I. I . I v . 0. -efiflo. - 50 CHAPTER V v GROWTH OF THE ECONOMY IN THE 60'S Fortune50 and Financial World51 have selected growth industries for the 60's. Both agreed on the basic industries. Their lists included chemicals, electronics, electrical equipment and machinery, paper, metal gas and electric utilities and oil. Chemicals Chemdcals and electronics have a past and future unequaled. Chemical production has been growing since records have been kept with no sign of stopping. Much of this growth has been due to the multitude of new products that have come from their research and development pro- grams. Plastics represent one of the fastest growing parts of the chemical industry. With present day expansion the business leaders are convinced the chemical industry will continue to grow. ' Financial World52 says the closely allied field of drugs will also show much growth. Some of this will be due to wide use of the miracle drugs and vitamins. New products as a result of the research and development programs will undoubtedly add to this growth. Office Equipment Electronic advances have found ready uses in office equipment, especially in computers, which will increase three times.53 "Despite 50"The Market Behind the Markets," Fortune, December 1959, p. 110. 51"Growth Leaders for the Sixties," Financial World, March 16, 1960 p. 3. 5232;2’ 53 Fortune, loc. cit., 51 aggressive deve10pment in the past few years their potential has hardly been touched. The further gains anticipated for data processing equip- ment make the office machinery field a dynamic one despite foreign com- petition for typewriter makers."54 Transport Equipment and Machinery Financial World limits its projection to other types of elect- rical equipment that would grow due to the influence of electronics on automation. Fortune feels that transport equipment and machinery will become very mechanized and automated; much of this growth will be the result of advances in electrical and electronic equipment. vIndustry constantly increases the use of machinery to increase productivity. Paper Both magazines agreed that paper is a growth industry. Pro- bably the packaging of consumer goods has been the greatest cause for this growth. "Production has practically doubled within the past fif- teen years. In view of the wide variety of uses for various kinds of paper and board, producers will undoubtedly find demand for their output "55 "New uses are also being continuing to rise for many years to come. developed, e.g., as a raw material for disposable non-woven fabrics. Scott Paper is already producing disposable sheets and towels for the Army on an experimental basis; it may be cheaper to throw away the linens than to launder them."56 Gas and Electric Utilities The steady increased uses of electricity and natural gas is expected to continue. "Residential use of electricity has doubled in 54Financial World, loc. cit. 551b1d. 56Iortune, loc. cit. p. 254. 52 in less than a decade,...residentia1 customers have risen by one-fourth."57 This trend will continue in states like Florida, Arizona, Texas and.Califor- niaWhemme,pofnflmtiomisrapidly.. increasing. Commercial uses of elec- trical power are growing. The "Big Inch" and "Little Inch" gas pipe- lines have made natural gas available to heat houses. So natural gas has also shown much growth. Utility companies have the amount of their debt regulated by law. So they often sell preferred stock\for expan- sion money. They often use: fifty to sixty per cent of their earnings for dividend payments. 011 Although "oil is now in world-wide oversupply, these are tem- porary problems which should be solved within a few years."58 "U. S. consumption of oil, which has been growing by six per cent a year, should rise by at least 3.5 to 5 per cent a year in the 1960's."59 Due to the common use of cars and trucks and the increasing p0pulation the continued demand for oil will continue. The petrochemicals are chemicals made from oil and natural gas. These products include synthetic rubber, plastics, wrinkle proof fabrics, soapless soaps and éthylene. In 1958 the production of chemicals from petroleum and natural gas totaled 28% of the United States chemical production.60 Even though competition has trimmed the profit margin, 57Financial World, loc. cit. 58Ibid. 59Fortune, loc. cit., p. 248. 60Petrochemicals Have High Growth Rate," Financial World, April 8, 1959, p. 5. 53 continued research will keep the petrochemicals growing. In summary, "no projection can be more than a statement of probabilities; the future has to be earned. But the U. S. economy has certainly not lost its capacity to grow, and perhaps more important, it has not'lost the adaptability and Eapacity for innovation that flow 61 from competition and private initiative." 61Fortune, loc. cit., p. 257. 54 CHAPTER VI CRITERIA.FOR SELECTION OF COMPANIES WITHIN AN INDUSTRY Sales and Earnings Record Before becoming a part owner of any business, the financial and management records of the company should be thoroughly investigated. The sales record for the last five to ten years is a good indicator. The sales should be growing three per cent or faster each year. The earning record should also increase. Sales and earnings are influenced by management, production and sales efficiency, research and develOp- ment, proper financing, labor relations and cost controls. Each step is important and effects the end results. Price Range--Current Price The price range of the stock should always be checked for the last year. Then this should be checked against the current price before making your selection. Price-Earning Ratio The price-earnings ratio is the relation of the price to earnings. An example would be if the current price is 48 and the current earnings is $3 per share, the price-earnings ratio is 16 to l or an earning yield of 6.25 per cent.62 Price-earnings ratios vary in different industries. They should be checked with the latest information available. At one “time a price-earning average of 10 was considered good. Today, due to 62Barnes, loc. cit., p. 53. 55 the increased demand for growth stocks this may easily be from 15 to 25. Dividend Pay-out Dividends are also important for consideration. The growth companies often pay out a low dividend,even though the earnings are high. The retained earnings may be plowed back for new plant and equip- ment and other expansion uses. In a growth company this can easily re- present 60 per cent or more of their earnings. When investing in income stock a higher percentage is looked for in dividends. To find the per cent of dividends that have been paid out from the earnings--the divi— dend is divided by the earnings. If you want to know the yield of your security--you divide the dividend by the price you paid per share. That part of the earnings not paid out is plowed back into the company for expansion, modernization or research and development programs. Plow Back A growth corporation plows back or reinvests part of the earn- ings in the business. For this reason growing companies pay small divi- dends. "A growth company plowing back at a rate of twelve per cent of its invested capital each year can double its assets in about six years."63 Usually this money is used to purchase new plant and equipment. This might be to increase production or to make a more efficient operation. Research.and Development Research and development programs are carried on by all aggres- sive companies. New products are a part of our way of life and it is 63Barnes, loc. cit., p. 44. -..-f 56 new products and new ideas of processing that keep America's industry 64 says that companies that use three to four per cent growing. Barnes of the sales for research and development enjoy a ten per cent increase in growth. There is more than $200 million scheduled for research and development programs in the drug industries this year compared with $39 million in 1950.65 This vast program helps explain the growth and the high price of drugs. Capitalization Always investigate the capitalization of the corporation before investing your money. Corporations that show a high ratio of bonds and preferred stock to common stock, may not be good growth companies. Since preferred stock pays a fixed dividend this may prevent maximum growth for a company which needs to plow-back much of its earnings for expansion. However, the interest on bonds is tax deductible; therefore bonds may be desirable for a rapidly growing industry. There are corporations that only have common stock in their capitalization. These might be a better selection for the individual investor. Working Capital Working capital needs to be adequate and show improvement from year to year. Working capital or net current assets is the difference remaining after subtracting current liabilities from current assets. The working capital should be large enough for a company to meet its 64Tb1d. 65"The High Cost of Drugs," Changing Times, August 1960, p. 26. l) 57 obligations and expand its volume. The working capital varies in dif- ferent industries. Utilities can operate on less capital than a mer- chandising company. The book value of an industry is an important figure. It is the value of something that is shown in the books of the company. To find the book value of bonds the value of the bonds, preferred stock, common stock, reserve and surplus are added together and divided by the number of bonds outstanding. This then represents the book value of the bonds. The book value of common stock is not so important as it is to the senior securities. The book value of common stock can be used as a comparison. The book value of common stock can be found by adding the common stock, reserves and surplus and then subtracting for patents and good will. This net book value then must be divided by the out- standing shares of common stock to get the book value per share. Generally speaking an industry should have no more than a quarter of its capitalization in bonds and the common stock should at least equal all senior securities.66 If this is not true and a company has a large proportion of bonds and preferred stock outstanding in rela- tion to the common stock, this company is said to have high leverage. These may be growth companies, but they do become more speculative. Companies should not be overburdened with debt. Debt is only good if it provides increased earnings. 66"How to Read a Financial Report," Merrill Lynch, Pierce, Fenner and Smith, p. 18. Management Rating Management ratings are made by Forbes and stock and bond ratings by Fitch, Moody, Standard and Poor's and Financial World. These should be studied carefully before any financial decision is made on buying an investment. 58 59 CHAPTER VII SAMPLE PROBLEM Each individual or family must decide on the investment objec- tive--income, growth or a combination-~to stress. Before making this decision Prime67 feels these things must be considered: (1) your fin- ancial position which involves age, dependents, insurance and cash re- serve, (2) the degree of risk you can justifiably assume, and (3) the income required from the investment. Each basic portfolio should show sufficient savings in an insured savings institution and adequate insurance to provide against disability and provide for dependents. Then investment securities should be pur- chased to complete the objective. For the purpose of this problem the following assumptions have been made for a professional woman with no dependents: The investor has (1) savings equal to more than six months salary or at least enough for twelve months living cost, (2) adequate insurance for illness and death expenses, other current debts and taxes due, (3) earned full social security benefits. Today's maximum at sixty-five is $119.00. This amount is scheduled to increase. (4) Earned the right to pension payments of approximately $200 per month (5) fifteen or twenty more years to work so wantsto invest in growth stocks as a hedge against inflation and the uncertainties of the social security and pension programs. In order to limit the area of the growth stocks rubber has been selected as an industry to evaluate. The study has further been limited 673.'Prime, "Investment Analysis," p. 192. 60 to the five major companies. Facts have been collected from reliable sources. Table 11 shows the leading tire manufacturers. Moody68 says tire and rubber stocks offer skills, opportunity and financial ability for significant growth earnings in the 19603. It is somewhat cyclical, but long term growth is quite certain. The tire business is highly competitive and growth does have limitations. With the number of cars growing constantly tires will take most of the pro- duction. The major tire companies have introduced lighter weight nylon tires to lessen the price gap and capture more of the replacement mar- ket from the secondary producers. Much of the growth of the rubber industry will come from expansion and diversification. Chemicals and electronics have accounted for much of the diversification, through synthetic rubber, plastics and missiles. Firestone Tire and Rubber is expanding by using $120 million of their earnings. Some of the expansion will be in foreign countries, namely Canada, France and India. 'Moody69 rates Firestone in a strong competitive position. They have their own rubber plantation and sell many of their products through the 700 stores they own. They make a variety of synthetic rubber, plastic and steel products. General Tire and Rubber's real growth possibilities comes from Aerojet-General division. They are the leading maker of rocket engines. 70 RKO Teleradio Pictures is 100% owned by General Tire. 'Moody thinks there will be a price decline due to cost of a new tire plant and the smaller margins on_truck-tires. 68Moody's Stock Survey, July 18, 1960. 691bid. 7OIbid. 61 .Nmm .a .oomH .mH sash .wo>n=m xuoum mesa: =.m.oe can an assets you axooum onus: * camw HouHmmU 0mm moppfiosH mow xooum fim msam AmV napouo xsu oqa mopsfloaH Amv Hm NoAOuoo mode Hook Hoomfim Amv om HonEo>oz mpso Nook Hmomam Asv oBu doauoom pH coaumwuomon AHV mH.e mm «\m me-m\m as o~.N om.m om.m ham nuance .m.= a.mofi «.me on.“ em em-w\m Hm om.o mN.~ om.N aam.H uccseooo a.mmm a.Hoe Amv Ace ew.m am m\m om-e\H moH oN.~ mH.e mm.e «as aunneoow m.HoH a.mm Amv me.H mm axe ee-e\m om oo.H em.e oe.e has essence e.o- H.¢NH Amv Aev ama.m om e\m mm-om oo.Hw me.~w oo.~m me.Hw «couscous m.mmH w.oHH Amv Ame «wane mmmfi coma AHHHav nuance .ncum paoww ooqnm ooaum .H>Hn mwdacuom .umm moadm oownm .>HQ “accuse “cocoa ooimmmfl .HeaH chasm com mmmfi museum manxaum ahouimaoqAHw cmmmmaauamnz1949 579.6 92.6 364.5 633.5 518.2 50 690.6 125.4 514.6 845.1 696.5 51 975.8 170.8 599.2 1,101.1 838.0 52 '965.4 185.9 588.4 1,138.4 850.1 53 1,029.4 205.4 674.6 1,210.5 838.5 54 916.0 217.0 630.7 1,090.1 782.5 55 1,114.9 295.7 755.0 1,372.2 925.5 56 1,115.2 390.5 724.2 1,358.8 901.3 57 1,158.9 421.2 734.7 1,421.9 873.6 58 1,061.6 469.8 697.3 1,367.6 870.6 59 1,187.8 676.9 771.6 1,579.3 976.8 Earnings (net income) ($900) 1949 17,824 1,015 20,936 20,231 15,100 50 33,268 8,558 34,708 35,109 24,658 51 48,399 7,017 34,743 36,628 30,366 52 43,082 6,148 32,364 39,010 28,170 53 46,749 6,275 34,227 49,323 32,732 54 40,510 4,503 38,816 48,055 27,959 55 55,379 9,705 46,662 59,666 33,559 56 60,539 10,860 43,765 62,456 31,870 57 61,692 11,300 39,370 64,826 29,695 58 53,752 11,279 35,457 65,741 22,671 59 64,597 26,624 37,580 76,009 35,580 Price Range 1959 503--402 866--44l a 1032---762 513--39l 693--456 Current Price* 35 54 1/8 59 36 1/2 49 7/8 Price x Earnings ratio 19.3 13.5 51.5 19.8 10.8 Dividends paid each year since 1924 1937 1939 1937 1943 Earning per share 2.44 4.84 g 4.18 2.29 5.30 Div. pershare .87 + 2% stock .775 2.20 0.825 2.05 Div. pay % 35 16 53 36 39 Average Yield % 1.8 1.2 2.5 1.8 3.5 Stock Split Capitalization ($000) 2 for 1--10/11/51 1/15/55 3 for 1--2/23/60 % Debt $ $91,750 14.7 Minority Int. 2,748 .4 Pfd. (4.5%) 800 .1 Common & Surplus 532,837 84.8 No. of shares (NP) 26,382,096 Working Capital ($000) 394.5 Ratio X 3.6 Rating . Financial World (6/20/60) B+ Moody July 1960 High Grade 8 & P July 1960 A+ 9O a~~adjusted for stock splits 2 for 1--4/52 3 for 1-~9/57 87,671 125,183 c~-inc1udes $33 mill plant replacement reserve g-—inc1udes 24c a sh ($218 mill) capital gains % 3 for 1~~1/51 2 for 1~-1/55 % 35.9 41,311 9.1 9,476 3.9 —~-- 20,921 8.6 -—-- 51.6 c:410,488 90.9 (P250) 5,265,912 (P10) 9,000,314 112.7 251.7 2.4 3.8 B B+ Speculative High Grade 3+ A 90 80 231,016 20,126. 561,788 (NP) 33,163,217 (P5) 510.4 5.2 3+ A+ 95 *--Barron‘s, August 8, 1960 X—~Financia1 World, August 1960 % 28.8 2.5 69.1 Medium—grade 159,920 12,917 (8%) 65,109 247,526 5,730,453 2 for l-~l951, 55 3 for 1-~5/52 3 for 1--12/59 % 33 312.2 3.1 3+ A— 75 2.7 13.4 50.9 Speculative **Moody's Handboo&;of Widely Held Common Stock-~Second 1960 Edition “J 64 increased every year but 1954. The capitalization is in good position. There is no preferred stock and they have sufficient reserve capital for their expansion program. Edwin Joel Thomas was made the chief executive in 1956 and has an insatiable desire to be first. He has added "resourcefulness and flexibility, careful cost control, vigorous marketing practices and dedicated capital efficiency,"73 through appointment of younger men in management positions. Earnings have been increased by such things as increasing the volume 16% with fewer employees and new catalysts in the polyester plant that boost production 15 to 20 per cent with no extra cost. They have a price earning ratio of 19.8 and have a medium grade rating by Moody and an A+ rating by Standard and Poor's. Forbes7€ gave a rating of 75 and says with their sales, earnings and profits they will be hard to beat. For the above reasons I believe Goodyear will be a good growth stock to buy and hold. 73Ibid. 74Forbes, loc. cit., p. 18. ., ‘1 65 CHAPTER VIII SUMMARY In building toward financial security everyone should make plans to meet his needs and desires. The first step would be to build a reserve fund to be kept in a safe place to meet any emergency situation. Then build a fund that could be used to invest in the stock market through an investment service, the monthly investment plan or indivi- dual selection. Collect reliable and current information through such publica- tions as Fitch,'Moody, Standard and Poor's,Barron’leinancial World and Forbes. After complete analysis and careful study select and pur- chase the investments of your choice as personal and economic conditions seem to indicate. 'Do not assume any unnecessary risks. Watch your purchases. Income stocks should pay you a consistent dividend. Growth stocks should show growth, perhaps not every year, but over a period of time. An investor with several years to work will wané more growth stocks .than the investor that is near retirement age. A.ba1anced portfolio helps minimize risks. It should be bal- anced by the use of bonds and stocks. The percentages and types must fit the individual objectives, needs and desires. a) 66 CHAPTER IX CONCLUSIONS Long term financial plans must include fixed and variable income securities. The fixed income may be from savings in banks, savings (or building) and loan associations and credit unions; in life insur- ance, straight annuity, bonds and/or preferred stock. Variable income might come from real estate or common stock. The common stock may be the result of a special mutual fund that had been purchased monthly or quarterly starting as soon as a savings account had been built. The mutual fund could be a special one-- like electronics or chemicals. In this way the small investor achieves diversification. Common stock could be purchased individually if this pleases the investor better. Either or both of these could be sold at retirement and an annuity purchased with options selected to suit the individual. Financial security at retirement age is the outcome of careful planning and successful investing. 67 BIBLIOGRAPHY Babson, Roger W. "Business Barometers for Profits, Security--Income, Harper, 1958. Barnes, Leo. "Your Buying Guide to Mutual Funds" American Research Council, 1959. Barnes Leo. "Your Investments," American Research Council, 1959. Bradley, Jo and Wherry R. "Personal and Family Finance," Rinehart, 1957. Clarke, Joyce and Dickson, S. "A.Woman's Guide to Financial Security," M. Barrows, 1953. Cobleigh, I. N. and Durgin-J. H. "How to Gain Security and Financial Independence," Hawthorn, 1956. Cooper, Robert U. "Investments for Professional_Peop1e," Macmillan, 1959. Doane, C. R. and Hills, E. J. "Inyestments f Trusts, and Funds Engel, Louis. "How To Buy Stocks" Little Brown and Co., 1957. Emaflistle ,, F. 1., "Practical Guide to Your Financial Future," Vantage Press, 1957. Gellerman, Henry. "How to Make Money Make Money" Thomas Y. Crowell, 1957. Friedman, Milton "The Theory of the Consumption Function," Princeton University Press, 1957. Grant, E. Stanley. "Lifetime Investing for Security and Growth," Expo- sition Press. ' Hanson, Art and Cohen, Jerome B. ~"Persona1 Finance," R. D. Irwin, Inc., 1954. Hayes, Douglas. "Appraisal and Management of Securities," Macmillan, 1956. Katona, George "The Powerful Consumer," McGraw-Hill, 1960. Lasser and Shulsky, Sam. "How to Inveét Your Money," "Investing for Retirement" Lasser Tax Institute. Leavitt, J. A. and Hanson, Carl. "Personal Finances," McGraw Hill, 1950. Leibenderfer, John E. "Planning Your Financial Indepence," University of Oklahoma Press, 1954. “ Morgan, Alice. "Investors Road Map," Simon-and Schuster, 1956. 68 Nickerson, William. "How I Turned a $1000 into a Million in Real Estate" Simon and Schuster, 1956. Prime, John H. "Investment Analysis," Prentice-Hall, 1959. Putnam, Mabel R. "What Every Woman Should Know About Finance," Scribners, 1955. Rogers, D. I. "Financial Facts of Life, How to Read a Financial Report" Holt, 1959. Straley, John A. "What About Mutual Funds" Harper, 1958. Webster's Collegiate Dictionary, Fourth Edition. Bulletins 1957 Annual Report, "Teachers Insurance and Annuity Association--College Retirement Equities Fund" Federal Reserve Bulletin, August, 1957. Linton, M. Albert. "Social Security and Life Insurance" N A I C Bulletin, "The Life Insurance Industry, Frank Helm, September, 1959. National Association of Mutual Savings Banks, "Important Facts About Mutual Savings Banking" Periodicals Barron's Changing Times Financial World Forbes Fortune Moody's Stock Survey The Saturday Eveninngost 2122 U. S. 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