ASK THE FOOL
More stock: Yea or Nay?
Q: My proxy voting materials show that one of my holdings wants to issue more stock. Should I vote for or against that?
A: It depends. Many investors frown on additional stock issuances because that can dilute the value of existing shares.
This simplified example can help you understand how: Imagine there’s a MacDonald Farms, Inc. (ticker: EIEIO) that has just 100 shares of stock outstanding, and you own 10 shares, or 10%. If the company issues 20 more shares, it will have a new total of 120 shares, and your 10 shares now represent only 8.3% of the company. The value of your shares appears to have dropped.
The issuance of additional stock isn’t always terrible, though. Sometimes it’s for a stock split or for employee stock options.
If the additional shares are issued in order to buy another company in a well-structured deal, adding them may be a smart move: The acquisition might add much more value to the company than the cost of the additional shares. If a company uses the money raised to grow its business effectively, shareholders can still win.
Q: What’s negative amortization?
A: When you decrease a loan balance (such as a mortgage balance) over time by making payments toward it that cover interest charges and part of the principal, that’s amortization.
Sometimes, though, your mortgage payment may not cover the interest due. That results in negative amortization, where your loan balance grows instead of shrinking because the unpaid interest is added to your principal.
Negative amortization is a feature of adjustable-rate mortgages that offer low minimum payment options, leaving borrowers owing greater sums and sometimes ending up facing foreclosure.
MY DUMBEST INVESTMENT
Dear Fool: Back in January 1997, I spent about $22,000 on 800 shares of Coachmen Industries, a maker of recreational vehicles (RVs), modular housing and more. Within a few years, the shares had dropped significantly, leaving my investment worth far less.
I had trouble deciding whether to hold them or fold them.
H.E., Elkhart, Indiana
The Fool responds: Your story raises some questions. For starters, how much of your portfolio was in Coachmen? If Coachmen held a big chunk of your assets, then you were under-diversified and had taken on a lot of risk. A 50% loss of all your assets is huge, but if only, say, 5% of your portfolio was in Coachmen stock, then you would have lost only 2.5% of it when Coachmen dropped by half.
You live where Coachmen was based, so it appears you were smart to buy a company that you probably knew rather well. You may have known some employees and could have kept up with it via the local newspaper. The company fell on hard times, though, by the late 2000s due to high fuel prices, slumping sales and a credit crisis. As happens to many companies in trouble, it ended up selling off its businesses, with Forest River (a Berkshire Hathaway subsidiary) acquiring the RV division in 2008 for $42 million. The vast majority of employees got to keep their jobs, so it wasn’t all bad.
THE MOTLEY FOOL TAKE
General dividends and growth
General Mills (NYSE: GIS), the packaged-foods giant with brands such as Cheerios, Totino’s, Nature Valley, Haagen-Dazs, Betty Crocker, Pillsbury, Old El Paso, Larabar, Gold Medal and Chex, has raised its dividend annually for 15 straight years. It spent just 55% of its free cash flow on that dividend over the past 12 months — leaving plenty of room for future increases — and its dividend recently yielded a solid 3.8%.
General Mills is a slow-growth company and reported nearly flat organic sales growth over the past year. Many of its classic brands struggled with softer sales as consumers pivoted toward healthier foods.
So why invest in it? Well, it has countered those declines with three main strategies: acquisitions, including organic food maker Annie’s and premium pet food maker Blue Buffalo; new variations of classic brands, such as Go-Gurt and Yoplait Whips; and price increases. Acquisitions have boosted its sales growth, while price increases offset its slowdown in unit sales.
The company also sold noncore assets, such as Green Giant. And it has been cutting costs, too, which has boosted profit margin.
There are some issues, though. Its debt load has swelled due to acquisitions, and organic sales and earnings are growing slowly. But with a forward-looking price-to-earnings (P/E) ratio recently in the mid-teens, the stock’s price is appealing, and long-term income investors should give General Mills some consideration.